Hedging, Arbitrage, and the Financialization of Commodities Markets

Abstract:

The article provides an overview of the unfolding of the financialization of commodities in the 2000–2014 time frame. Different phases are described according to the positioning of the group of traders, their motivations, and the type of financial assets used to take a position in commodities. The main theme is the failure of arbitrage to level prices of similar financial assets traded in different markets. However, this failure does not depend on financing constraints suffered by arbitrageurs. Following Mirowski (2010) it is shown that arbitrage becomes a form of financial innovation rather than an equilibrating mechanism in contemporary financial markets. Historical accidents and changes in policy affect the positions of groups in the financial market game. The various strategies used are explained by creating a set of T-accounts for the various groups that highlight the winners and the losers in the various phases.

Keywords:

• arbitrage
• commodities
• complexity
• innovation

ACKNOWLEDGMENTS

The author would like to thank two anonymous referees for having provided interesting comments that helped to improve the article.

Notes

In the period 2005–10, the prices of many agricultural commodities futures contracts settled much higher than the corresponding delivery market cash prices (Ademijan et al. 2013).

The involvement of banks in the commodities business has been the object of an investigation by the United States Senate (2014).

On the collateralization of commodities, see Kaminska (2012) and UNCTAD (2015).

Additional information

Notes on contributors

Domenica Tropeano

Domenica Tropeano is an associate professor in the Department of Economics and Law at the University of Macerata (Italy).