Financialization and the Rise in Comovement of Commodity Prices

Between January 2000 and June 2008, the FAO food price index rose by 96 percent. Besides the magnitude, the price rise was remarkable for the broad range of commodities affected; prices of agriculture commodities, energy, and metals all rose and fell together. These dramatic developments coincided with the rise of commodities as an asset class. In this paper, I study the causal links between the increase in comovement between commodity prices and this financialization of the commodities futures market. I extract common factors from a group of 41 commodities using the PANIC method and include it in a factor-augment VEC model along with a proxy of financialization. Results from the empirical analysis show that financialization of the commodities futures markets led to the recent rise in comovement between commodity prices.