Financialisation of Commodity Markets

Question 1

Why do Commodities matter?

Answer 1

1) Major Share of World Trade

2) Concerns over prices - effects standard of living (food)

Question 2

What are the causes for the Commodity price spike in 2008?

Answer 2

1) Population growth (India&China)
2) Change in Diets
3) Dollar value fell rapidly
4) Weather - draught and hurricane Catriona
5) Biofuel - farmers switched their crop
6) Financial Speculation

Question 3

What was the impact of the spike on Consumers and Producers?

Answer 3

1) Volatility created risk
2) Inflation on consuming countries
3) Fall in export earnings for producing countries
4) Producers inability to deal with crisis - poor credit conditions or opportunity to spread risk

Question 4

What are the measures of volatility?

Answer 4

1) Coefficient of Variation
2) Unconditional Volatility
3) Conditional Volatility

Question 5

What is Unconditional voltility?

Answer 5

The standard deviation of returns. Returns are proportional to change in price from one period to next.

Question 6

What is Conditional volatility?

Answer 6

An exponentially weighted moving average of past squared innovations. It is a measure of deviations and error terms related to past information.

Question 7

What did Gilbert and Morgan find?

Answer 7

1) Volatility fell in period 1990-2007 compared to 1970-89
2) No evidence of an upward shift in scedastic process in 2007-09
3) Garch was poorly determined, undermined the model

Question 8

How did the Commodity market change?

Answer 8

1) Long-only index funds, ETFs, Over-the-counter funds led to many tradable contracts without any change in production/consumption of the underlying commodity
2) Futures/options crude oil contracts increased by 34%/27% between 2003-05 whilst production 10%