The influence of Financialization on the commodity market

Transcription

1 The influence of Financialization on the commodity market Name: Toussaint Vissers ANR: Supervisor: Martijn Boons

2 Table of contents TABLE OF CONTENTS 1 CHAPTER 1: INTRODUCTION 2 CHAPTER 2: INVESTING IN THE COMMODITY MARKET 4 CHAPTER 3: PARTICIPANTS IN THE COMMODITY FUTURES MARKET 5 CHAPTER 4: TRADITIONAL THEORIES ON PRICE CHANGES 8 Demand and supply 8 Open interest and hedging pressure 9 Basis and Momentum 10 Macro-economic Factors 10 CHAPTER 5: FINANCIALIZATION 12 Speculative influence 13 CHAPTER 6: THE EFFECT OF THE FINANCIALIZATION ON COMMODITY PRICES 15 Commodity price correlation 15 Commodity price level 17 Commodity price volatility 18 CHAPTER 7: CONCLUSION 20 BIBLIOGRAPHY 22 1

3 Chapter 1: Introduction Commodity prices have been rising since the beginning of 2000 to 2008, and after that prices suddenly were cut in half. About the sharp increase in price, John Browne, chief executive of BP in 2006, said: There has been no shortage and inventories of crude oil and products have continued to rise. The increase in prices has not been driven by supply and demand. So the rise and decrease of the commodity prices were not mainly formed by supply and demand. Fadel Gheit, Managing Director and Senior Oil Analyst for Oppenheimer & Co. Inc. stated in 2008 the same as John Brown, and added that he believed that there was only one reason why oil prices were so high in 2008, namely excessive speculation (Irwin, Sanders, and Merrin, 2009). Reasons for price changes in the commodity market have been investigated in several papers. These reasons can be divided in macro-economic reasons and futures specific reasons. Gorton and Rouwenhorst (2004) researched the macro-economic reasons by investigating the effect of the business cycle, and also, like Hong and Yogo (2010), by investigating the effect of the inflation rate on the commodity futures prices. Elaborating on the effect of the business cycle Irwin, Merrin and Sanders (2009) studied the physical demand and supply and their effect on commodity futures prices. Hong and Yogo (2010), De Roon, Nijman and Veld (2000), Gorton and Rouwenhorst (2004), and Miffre and Rallis (2006) researched the future specific reasons by investigating the influence of open interest, hedging pressure, basis and the momentum strategy on the commodity prices. A new factor influencing the commodity prices is according to Masters and White (2008) the increasing interest of the index-investors and with this the financialization of the commodity market. Where Masters and White (2008) already accused the index-investors of creating high, unreasonable prices, Tang and Xiong (2010) wanted to investigated if the financialization of the commodity market was the reason for prices to change and whether the accusations towards the index-investors where fair. 2

4 The main purpose of this research is to investigate the effect of the financialization on the commodity market and the contribution of the index-investors to the financialization. This will be done by investigating the price level of the commodity futures contracts, investing the correlation between different commodities and between the commodity futures market and stock markets, and as last we will look at the volatility of the commodity futures contracts and how it changes compared to the volatility of the stock market. The effect on the correlation level will be based on research from Tang and Xiong (2010), De Roon, Nijman and Veld (2000) and Buyuksahin and Robe (2010) who all claim that there has been a change in the commodity correlation level. The commodity price level shows, according to Irwin, Merrin and Sanders (2009), Aulerich, Irwin and Garcia (2010) and Stoll and Whaley (2010), only a small non significant rise or result. Tang and Xiong (2010) give an indication of the change in volatility level which is small. After combining the results we will see if the financialization could be seen as an important factor in the commodity price changes and whether these changes were due to the index investors. 3

5 Chapter 2: Investing in the commodity market The most common form of trading commodities is the physical delivery of a product between a producer and a consumer. Commodities however, are also traded in derivatives. In this research we will look at the derivatives, because we want to say something about the influence of the financialization, which is created by investing largely in financial instruments rather than in the spot market. Derivates being used to trade on a futures market are forward contracts and futures contracts. Because future contracts are standardized and therefore easy tradable, this research will only elaborate on the futures contract. A futures contract is a contract between two parties. One of them holds a long position in the contract, while the other party holds a short position. The long position has the obligation to buy a pre specified product for a pre specified price. The long position wants the price to rise, and the short position wants the price to fall. Because the price will always rise, fall, or stays equal, a futures contract is a zero sum game. This means that the profit of the long position plus the profit of the short position is equal to zero. If someone wants their contract to continue after time to maturity, they have to roll-over the futures contract. Roll-over futures is especially important for long-term investors. If they do not roll-over the futures at that specific moment, and let the futures expire, they will have to buy the physical commodity. Rolling-over futures means that investors have to sell their position before maturity and buy a new contract of the next month. Therefore, the total return earned by the investors is equal to: spot return + roll yield + collateral return (UNCTAD, 2009). The spot return is the return of the underlying asset. The roll yield is the difference between the selling price of the future maturing this month and the buying price of the future maturing next month. The roll yield will be positive when the expected future spot price is higher than the futures price, because the futures price converges to the expected spot price. Because future contracts do not require investors to pay the full cash position up front investors can invest this in other investments. The return on this investment is the collateral yield. 4

6 Chapter 3: Participants in the commodity futures market There are three kinds of investors investing in the commodity futures market: commercial investors, speculative investors and index-investors. Commercial investors want to trade futures contracts to hedge their risk. Hedging is the protection of financial risk. There are also non-commercial investors active in the commodity market. The commercial investor can be found both in the long and in the short side of the contract. In general, producers will go short, since they want to cover their risk of a price decrease. They will make less profit with their goods, but they cover this with the extra income of the futures contract. On the other side are the buyers who want to cover the risk they take when prices increase, so they have a long position. As earlier being said, for every long position, there has to be a short position and vice versa. Because the commercial investors are not equally divided, there is a second kind of investor, the non-commercial investors. The noncommercial investors can be split into two kinds, the speculative investors and the indexinvestors. Index investors are relatively new to the commodity market and thank their name to the fact that they often invest in an index fund, or index tracker (Wray, 2008). Index investors are large institutional investors like hedge funds, pension funds, insurance companies and banks. Index funds try to replicate the movement of an index by holding all the securities of an index with the same weights they have in the index. These investors invest in indexed instruments to reduce their overall portfolio risk. It has according to Gorton and Rouwenhorst (2004) three reasons that index investors invest in the commodity market. The first reason is to diversify their portfolio. Gorton and Rouwenhorst researched whether an investment in the commodity market would be beneficial for index investors due to the diversification of their portfolio. They did this by investigating whether there is a correlation between the return of a stock index and the return of a commodity index. The conclusion was that the returns were negatively correlated with each other. The negative 5

7 correlation would even increase if the holding time of the commodity increases. This diversification of the portfolio of index investors by investing in the commodity market is supported by Erb and Harvey (2006), who came to the conclusion that holding a portfolio with both the GSCI and the S&P 500 would be more profitable than investing in just the S&P 500. But this kind of diversification of the portfolio would only be profitable when investing in an index and not by investing in separate commodities. Index investors select several investments like stocks and bonds to diversify their portfolio; due to the negative correlation between stocks and commodities they will invest in commodity futures to diversify their portfolio. Because they invest to diversify their portfolio they become incentive for price changes, and therefore invest no matter how high the price is. The second reason for index investors to invest in the commodity market, according to Gorton and Rouwenhorst (2004), is the historical high return on a futures contract with a relatively low risk. The third reason for the commodity investments of index investors is that commodities perform well in an inflationary environment (Wray, 2008). Gorton and Rouwenhorst (2004) show that commodity futures return have a positive correlation with inflation. Index-investors always take a long position, because they are long term investors thinking prices will always go up. As being said earlier, the index investors are a relatively new group in the commodity futures market. They started to invest in the commodity futures after the collapse of the equities market of Researches published after 2000, like Gorton and Rouwenhorst (2004), made the index investors see that the commodity market was negatively correlated to the equity market and therefore investing in the commodity market would be good to diversify their portfolio and to reduce their portfolio risk. The speculative investors on the other hand are purely speculating on the price by taking the risk the commodity producers and consumers do not want to take. These investors will take long and short positions, depending on what the hedgers offer. 6

8 Commercial investors want to hedge their risk, and need speculative investors to accomplish this when the hedgers are not equally long and short. According to Keynes theory of normal backwardation, commercial investors should pay a fee to speculative investors as a return for the risk they are willing to take. This fee is the difference between the expected future spot price and the futures price. When there are more hedgers going short than there are going long, the futures price will be lower than the expected future spot price and backwardation occurs. The futures price is lower due to the fee from the hedgers to the speculative investors. When there are more hedgers going long than there are hedgers going short, the expected future spot price is lower than the futures price, and that is called contango. Keynes even state that the future price is an unreliable estimate of the spot price at expiration date. Several papers investigating the theory of normal backwardation could not find evidence for the theory (Chang, 1985), but more recent research for this theory is done by Gorton and Rouwenhorst (2008). Gorton and Rouwenhorst (2008) show that there has been a significant risk premium over the years 1957 to 2004 which is consistent with the theory of Keynes (1930). In the rest of the research we will discuss index-investors more than speculative investors, because the index-investors are the relatively new participant on this market and therefore could have had an influence on the market in the last few years. 7

9 Chapter 4: Traditional theories on price changes Commodity prices have fluctuated over time. In some cases it was due to recession or war, but there are some overall factors which caused commodity prices to fluctuate. Demand and supply The main factor influencing commodity prices are the supply and demand rate. When demand increases more than supply prices will rise and vice versa. This is an important factor in the fluctuation of the commodity market over time. In a report of the US Senate about the increase of the oil price the difference between demand and supply was a main factor. Reasons for these differences in supply and demand were the fast industrialization of countries like China, which drove up demand, and the vulnerability of the supply due to the political instability with oil producing countries. Irwin, Sanders, and Merrin (2009) came to a same conclusion when investigating the 2008 commodity bubble. According to them the main reasons for the high prices for the oil market were the same as the US Senate concluded, the high demand from developing countries. The price increase in the agricultural market was according Irwin, Sanders, and Merrin, due to the high demand from developing countries, higher demand in bio fuel and a shortfall in supply. The main reason of the price fall was the worldwide recession due to the financial crisis. An important reason for the shortage in supply could also come from the scarcity of some commodities. This is the main reason why commodity prices keep increasing over time. A theory according to this is the peak oil theory of Hubbert. Hubbert claims that the production of oil will come to a maximum at a specific time were he sees the production of oil shaped as a normal distribution (Salameh, (2008)). Salameh (2008) says that we already reached the peak, which explaines the high volatility in the oil market last years. These changes in spot prices also change futures prices. Futures prices depend partially of the future spot price and therefore the demand and supply of the spot market. A change in demand 8

10 and supply of the spot market changes the price of the futures contracts, but a change in demand and supply of futures contracts do not change the price of the spot market. Open interest and hedging pressure The open interest reflects the amount of contracts not being closed or delivered. Hedgers would have to pay a higher risk premium when this number is high, because they want to sell their risk. Hong and Yogo (2010) investigated this by using data from 1965 to They had data of the open interest and total return of several commodities and a 10 year Treasury bond. With this dataset, Hong and Yogo (2010) came to the conclusion that a high number in open interest of the future market predicts high returns on the commodity market, so they are positively correlated with each other. In a strong market a rise in open interest and a rise in trading volume will lead to a rise in the futures price. This rise in futures price will eventually lead to a lower expected return when the market is in backwardation, because the futures price will slowly go towards the expected future spot price. The 10 year Treasury bond gave low returns when the open interest of the commodity futures where high. This negative correlation between the open interest of the commodity futures and the return on the Treasury bond could be due to high inflation rates. Like Hong and Yogo, De Roon, Nijman and Veld (2000) also investigated the effect of the amount of traded futures on the return of the future. De Roon Nijman and Veld (2000) did not use open interest, but they used hedging pressure, which is the net position of the hedgers. If the net position is high, hedgers need many speculators to hedge their risk, so the risk premium would be high. The conclusion of de Roon, Nijman and Veld (2000) was that hedging pressure has a significant, positive effect on the futures returns. 9

11 Basis and Momentum Hong and Yogo (2010) used also other variables then the open interest to predict the futures price. One important variable is the basis. The basis of a future is the difference between the spot price and the futures price. Remind that this is not the same as the normal backwardation or contango. Gorton and Rouwenhorst (2004) came to the conclusion with their data of the commodity index over the years 1959 to 2004 that a high basis portfolio had better returns than a low basis portfolio. The momentum theory says that investors, in short term, follow the direction of price movements the commodity future is currently in. So if there is an upward trend investors expect that the price will continue to rise, because there would be a large number of investors who buy everything that is doing well. Miffre and Rallis (2006) try to see whether this is true for the commodity market. The momentum strategy would be investing in futures that outperform the market in the recent past and sell commodity futures that underperformed the market. In the commodity market backwarded futures contracts should be bought and contangoed futures contracts should be sold. The momentum portfolios returns outperform equally weighted portfolios and are not correlated to stock indices. Due to the high performance of this strategy it is likely that many investors follow this strategy and therefore influence the prices. Macro-economic Factors There are also factors which affect the economy as a whole and therefore also affect the price of the commodity futures. These factors are supposed to affect the systematic risk of the commodity future, beginning with the inflation rate. Hong and Yogo (2010) thought earlier that a reason for the negative correlation between the open interest of the commodity futures and the return of the 10 year Treasury bond was the inflation rate. Hong and Yogo (2010) proved this by testing whether a high inflation rate could be predicted by a high open interest and their conclusion was consistent with this hypothesis. This also means that a high inflation rate contributes to a high return on a commodity future and therefore affects the price. 10

12 The second macro-economic effect which causes changes in the commodity futures price is the business-cycle. Gorton and Rouwenhorst (2004) saw that commodity futures perform relatively well in the early stages of a recession, and perform relatively bad in the later stages of a recession. When the economy is in an expansion the commodity futures perform better in the later stages than they do in the early stages of an expansion. This is expected when taking into account that stocks and commodity futures have negatively correlated returns, because stocks perform well in later stages of recession and early stages of expansion. Some of the factors influencing the price changes in the commodity futures market are related to each other. To begin, the business cycle is created by the demand and supply, and the inflation rate. When the demand is higher than the supply, this can lead to a high inflation rate and is the beginning of the late stage of expansion in the business cycle, leading to the early stage of recession. We can also conclude that a high open interest or hedging pressure leads to a high basis. The basis reflects the risk premium, which increases when open interest or hedging pressure goes up. 11

13 Chapter 5: Financialization Besides the traditional factors influencing price changes in the commodity market there is also a new factor in the commodity market, which could have affected price level, correlation and volatility. This factor is the financialization of the commodity market. The United Nations conference on trade and development reported in 2009 that the strong increase and decrease in prices were the result of the financialization of the commodity market. Epstein defined financialization as: the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions (Epstein 2001). In the commodity market you could see this as the movement from trading physical goods, to trading futures contracts. Figure 1 shows a sharp increase in the outstanding commodity derivatives from 2003, and also an increase in investments in the commodity market. Commodity index investments rose from 2003 to 2008 from 13 billion to 370 billion (Masters and White, (2008). Figure 1 outstanding derivatives 12

14 Speculative influence The financialization of the commodity market could have had an influence on the commodity prices due to the increasing speculative investments. The historical high returns on the commodity futures and their relatively low risk (Gorton and Rouwenhorst, (2004)) made it for speculative investors interesting to invest in the commodity market. The US Senate believed that speculative investors played a significant role in the high oil prices. The argument they gave was that there was an increase in future contract purchases by speculative investors, which increased the demand for oil. The increase in demand for future contracts lead, according to the US Senate, to an increase in the spot price of oil. The conclusion of the Institute for Agriculture and Trade Policy (2008) was consistent with the conclusion of the US Senate. The Institute for Agriculture and Trade Policy said that it was due to the selling of big speculative players the agriculture future commodity market collapsed. They stated that: The price drop is less a market correction than a collapse instigated by the consequences of deregulating markets. Their advice therefore is that the government should take action against these speculative investors. Also Masters and White (2008) state the price changes in the commodity futures market of the last decennium was caused by the index-investors. A first reason for this is according to masters and White the increase in price of all 25 commodities in the SP-GSCI and the DJ-UBS indices, where they expected some to rise and some to fall in price. A second reason is that indexinvestors bought in the years 2003 to 2008 more futures contracts than other market participants did. According to Masters and White this means that the index investors are responsible for the price rise and fall of the commodity market. Irwin, Merrin, and Sanders (2009) refuted the arguments of the US Senate, The Institute for Agriculture and Trade Policy, and Masters and White beginning with the statement that the futures market is a zero sum game. This means that for every long position, there has to be a short one. So the speculative investors cannot infinitely speculate on a price rise if no one 13

15 speculates or hedges on a price fall. The price of futures should be consistent with the information about the underlying asset. This would mean that one could profit from a difference in information within a few days after the future is traded, but by the time the future ends, the price of the future, should be close the spot price of the underlying asset. If futures trading would increase the demand for oil, like the US Senate says, this would mean that there are more people who want the physical commodity. This would be correct if all investors keep the contract until expiration date, after which they have to buy the physical commodity, because the ownership of the commodity only switches when there is a delivery. This is very unlikely, because speculative investors are not interested in the physical commodity and will probably roll-over their contract, or liquidate their position by selling or buying the same contract before maturity. So speculative investors cannot increase the price of the commodity by increasing the demand for the physical product (Irwin, Sanders, and Merrin (2009)). 14

16 Chapter 6: The effect of the financialization on commodity prices This chapter distinguishes between three elements of pricing that are hypothesized to be affected by the financialization of commodity markets: correlation, price level and volatility. Commodity price correlation There are two ways to look at the correlation of the commodity market and therefore the effect of the financialization on the commodity market. The first way is to look at the correlation between the different commodities within the commodity market. Tang and Xiong (2010) first looked at the correlation between the returns of commodities in the SP-GSCI and the DJ-UBS index. They saw that the average correlation was relatively high in the years 1975 to 1976 where they were around 0.3. In the years 1977 to 2005 the average correlation was low. A reason for this high correlation in the 1970 s was stagflation and oil supply shocks (Tang and Xiong (2010)). After the year 2005 the average correlation of the commodities in the two indices started to rise to levels far over those reported in Tang and Xiong (2010) even report of an average correlation of more than 0.5 in Reasons for these high levels of correlation are not the same as in the 1970 s. Commodities outside the SP-GSCI and the DJ-UBS index had the similar correlation levels as the SP-GSCI and DJ-UBS commodities, until From then, only the commodities within these indices increased in correlation level and the offindex commodities stayed at a low level with a maximum of 0.2 in This means that within the commodity market, there has been a shift in correlation, but how does the correlation of the commodities react across different markets? First we will have a look at how the correlations between different markets have been before the financialization of the commodity market. This is done in by De Roon, Nijman and Veld (2000), who investigated the correlation of the financial market and the commodity market over the years 1986 to Their conclusion was that there was a positive correlation within the markets, but the correlations between the markets where very low. 15

17 Tang and Xiong (2010) compared the daily returns of the SP-GSCI index with the daily returns of the S&P 500 index. During the last twenty years most correlation levels where between 0.2 and Only in 2009 the two indices became highly correlated with a maximum early 2010 of almost 0.6. A similar conclusion was made by Buyuksahin and Robe (2010) who investigated whether there was a correlation between the S&P 500 equity index and the SP-GSCI total return index over the years 2000 to They looked at the correlation during the financialization of the commodity index. According to them, the correlation between the S&P 500 en the SP-GSCI have been in 2009 between 0.4 and 0.6. Buyuksahin and Robe (2010) came to the conclusion that the equity-commodity co-movements are positively correlated to their proxy for financial-market stress. The financial crisis could be an explanation for the increased correlation level between the S&P 500 and the SP-GSCI. The findings of Buyuksahin and Robe (2010) are in contradiction with the findings of Hong and Yogo (2010), who found a negative correlation between the commodity market and the stock market. The main reason both researches came to different conclusions is that Hong and Yogo (2010) investigated data from far before the financialization. Although the outcome of both researches is different this is not a reason for Buyuksahin and Robe (2010) to say that it is not an effect of the financialization, or that the financialization is not mainly caused by the index investors. The major reason why this cannot be said is the presence of the financial crisis. The financial crisis made, due to its big uncertainty, market investors more sensitive to short term economic developments. This also affected hedge funds very much. Financial contagion is a reason for the sudden positive correlation between the two indices. Kyle and Xiong (2001) described financial contagion as the consequence of a shift between two markets or the liquidation within a market. Financial contagion occurred in the commodity market, because of two reasons. The first one is already being discussed earlier, namely the large investments of index-investors in the commodity market which increased future prices. This was the beginning of the financialization. The second reason is the financial crisis. The financial crisis made it for large index-investors, like hedge funds, necessary to liquidate some 16

18 of their portfolio investments to rebalance their portfolio. Their stock investments became less valuable, so they had to liquidate some of their commodity investments. The result was that the correlation level between stocks and commodities rose. Commodity price level As earlier being said, there was a sharp increase in price until 2008 after which the market collapsed and eventually rose again. There has been an increase in price over the last ten years of almost 250 percent 1. Because of the large amount of index-investors investing in the commodity futures market, and their price insensitiveness, the futures market did not collapsed due to its high prices. During 2008, when the financial crisis hit the economy and indexinvestors had to liquidate some of their investments, prices fell, because other investors, who had to take over their positions, are more price sensitive. This price fall is a combination of financial contagion and the market value of the underlying asset. Masters and White (2008) had some theories about the excessive speculation from indexinvestors who caused the price changes in the commodity market. They could not support their theory with empirical evidence. Irwin, Merrin and Sanders (2009) disproved Masters and White their theory with empirical results. At first they say that the excessiveness, what Masters and White main point was, is not true. Their numbers from the CFTC say that an increase, in speculators going long on several commodity futures over the years 2006 to 2008, is less than the increase of hedgers going short. Further, the few commodities where the increase was higher at the speculative investors going long than the hedgers going short was within historical bounds. This means that it was not due to the financialization, or the sudden interest from index investors. The possible price change is according to Irwin, Merrin and Sanders (2009) also not caused by the index-investors, because they tested with a Granger causality test whether there was a relationship between changes of the commodity prices and 1 According to the S&P-GSCI index 17

19 the Futures positions. There was only in 16 % of the measured commodities a relationship between these two numbers. Irwin, Merrin and Sanders proved with the Granger causality test that commodity prices did not changed due to the financialization. Another test to prove whether there has been a significant change in commodity futures prices due to the financialization has been done by Aulerich, Irwin and Garcia (2010). They do this for the periods and and test the futures return, because these returns are related to the price level. Aulerich, Irwin and Garcia say that there is no or little significant evidence state that the index-investors affected the direction and magnitude of commodity futures returns. So the price levels of the commodity futures have not been affected. Stoll and Whaley (2010) also test whether commodity index investing drive up prices using the Granger causality test. Stoll and Whaley (2010) use data from 12 commodities over the years 2006 until half Besides testing whether commodity index investing changes prices, they also look at whether changes in prices influence commodity index investing. After testing with a 5% probability level, they conclude that there is hardly any evidence of a relationship between commodity index investing and price changes. Only in 1 of the 12 commodities a significant rise in price is given for the rise in index investing. Commodity price volatility The volatility of the commodity futures prices are investigated by Tang and Xiong (2010). They look at both energy and non-energy commodities. The conclusion they make is that the volatility S&P-GSCI non-energy index increases over the years 2006 to 2010, from 0.15 to 0.3, while their volatility has been steady over the years 1990 to So the sudden change in volatility must have a reason. Tang and Xiong (2010) refer, to explain this sudden change, to a paper from Kyle and Xiong (2001) who investigated financial contagion. Change in volatility could be explained by financial contagion. The volatility rose in the years 2006 to 2008, but the main reason for this was the increase in demand for commodity futures, and therefore the increase in price. Although the volatility rose 18

20 during these years and investors are not fond of volatile investments, this increase in volatility was not a reason for investors not to invest in the commodity market. The commodity market did not become less attractive for index investors because other markets show a similar rise in volatility (Tang and Xiong, 2010). 19

21 Chapter 7: Conclusion The sudden increase in commodity futures prices during the years 2000 to 2008 and the immediate fall of commodity prices after that made it interesting to investigate whether this instability in the commodity market was due to the financialization. The financialization in the commodity market was created by an increase in futures trading in the commodity market by hedgers, speculative investors and index-investors. Index-investors have a significant influence in this financialization process, because this group of investors suddenly entered the market buying futures at any price. Masters and White (2008) show an increase in index-investments in the commodity market from 13 to 340 billion from 2003 to To see whether this financialization had an influence on commodity prices the correlation, price, and volatility levels have been investigated. The biggest change took place in the correlation level of the commodities. Both between commodities as between different markets correlation levels are rising. Trying to find an explanation for this rise Buyuksahin and Robe (2010) linked the increase in correlation to a financial stress level. The conclusion was that these two levels are positively correlated. Tang and Xiong (2010), and Buyuksahin and Robe (2010) showed that the correlation level only increased after The increased correlation after 2009, and the positive correlation with the financial stress level of Buyuksahin and Robe (2010) makes the financial crisis the main cause correlation levels rose. According to Masters and White (2008) price levels of the commodity futures market would have increased due to the influence of index-investors, but they do not support their theory with sufficient statistical evidence. Researches which has statistical investigated the price levels and the influence of index-investors on the price levels are from Irwin, Merrin and Sanders (2009), Aulerich, Irwin and Garcia (2010) and Stoll and Whaley (2010). They all conclude that there is little or no significant evidence that the index-investors changed commodity price levels. 20

22 The volatility of the commodities rose over the years 2006 to 2010 (Tang and Xiong (2010)). The volatility of the stock market also increased over those years. It is therefore again hard to say whether index investors caused this rise, or that it was due to the financial crisis. In this research we see that there is little or no evidence that the financialization of the commodity market caused commodity prices to change. Traditional theories like business cycle, inflation and basis are better predictors for commodity prices. 21

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