Commodity Financialization and Information Transmission

Liyan Yang Itay Goldstein   - Nov 21, 2017

We study how commodity financialization affects information transmission and aggregation in a commodity futures market. The trading of financial traders injects both fundamental information and unrelated noise into the futures price. Thus, price informativeness in the futures market can either increase or decrease with commodity financialization. When the price-informativeness effect is negative, the futures price bias can increase with the population size of financial traders. Commodity financialization generally improves market liquidity in the futures market and strengthens the comovement between the futures market and the equity market. We find that operating profits and producer welfare move in opposite directions in response to commodity financialization, which provides important guidance for interpreting related empirical and policy studies.