Three Essays on the Dynamics of Commodity Markets

Abstract

This thesis examines the effect of weather events, monetary policy, and financialization on changes in global inventory, futures prices, spot prices, futures returns, and producers’ equity returns of exchange-traded commodities. First, I investigate the relationship between temperature and precipitation anomalies on aluminium futures returns. Prior research only examines the effects of weather anomalies on soft commodities, although flooding, drought and temperature are also identified as disrupters to mining operations in both regulatory filings and media reports. However, I find no evidence of weather effects on aluminium futures returns. Instead, the evidence suggests that inventories provide enough buffer for weather events and that trading around such events is unlikely to yield abnormal returns. Second, I investigate the relationships between metal futures returns and global monetary policy and demonstrate that a multiplier ratio created to proxy for market liquidity and the effectiveness of unconventional monetary policy is positively related to the price of industrial metals. Contrary to prior research, there is little evidence of a relationship between real interest rates and industrial metals futures returns. These findings will enhance the ability of policymakers and other agents to determine whether the intended effects of quantitative easing are being transmitted to the markets. Third, I investigate the role of financialization in shaping the relationship between non-commercial speculation (hereinafter, speculation), trader concentration, and commodity futures returns. While prior studies variously find evidence of stabilising, reinforcing and destabilising effects of speculation upon returns, I show that speculation does not Granger-cause futures returns but that there is evidence of reverse causality from futures returns to speculation. Additionally, commodity futures returns respond to the publication of open interest information. Overall, financialization reduces the power of individual traders to set futures prices in a concentrated commodity market. These findings support a policy approach aimed at enhancing transparency rather than adding regulatory controls.