Commodity Financialization and Information Transmission

Liyan Yang, Itay Goldstein  , - Jul 06, 2018

Working Paper No.   00035-00

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

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delegation supply channel price informativeness Liquidity comovement welfare commodity financialization futures prices bias