A1105
Title: Are commodity markets segmented: Understanding cross-asset interdependencies using stochastic spanning
Authors: Argyro Kofina - Athens University of Economics and Business (Greece) [presenting]
Evgenia Passari - Universite Paris Dauphine (France)
Nikolas Topaloglou - Athens University of Economics and Business (Greece)
Abstract: There is mixed evidence on the integration of commodity markets with equity and bond markets. On the one hand, a number of papers document that standard equity asset pricing factors cannot explain the cross-section of commodity futures returns, implying market segmentation. On the other hand, there is some evidence that the recent financialization of commodities tends to integrate markets. A unified approach is proposed for the study of commodity price behaviour that builds on a existing theory. According to the theory, large supply shocks exacerbate market segmentation by limiting the willingness of market specialists to trade across markets. At the same time, it is explored whether demand shocks encourage market integration through increased investing across asset classes and during periods of big financial distress as investors redirect portfolio flows out of risky portfolios and into safe assets. In particular, the differential degree of market segmentation is formally tested for under narratively identified supply and demand commodity developments by employing a non-parametric, distribution-free measure of stochastic dominance.
