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Nicolas Maystre and I have just published research that adds to the empirical evidence showing that the financialization of commodity markets has an impact on the price determination process. Indeed, many recent price movements of commodities are hardly justified on the basis of changes of their own supply and demand.  This work further supports the arguments of a recent UNCTAD study that, as commodity markets become financialized, they are more prone to external destabilizing effects. In addition, the tendency to deviate from their fundamentals exposes commodity producers in developing countries to sudden and sharp corrections.

Our study points to a structural break on commodity markets that started in September 2008 by considering short time intervals like 1 or 10 seconds. After discussing several hypotheses, we attribute this break to High Frequency Trading (HFT) strategies and in particular trend following strategies. The study quickly attracted media attention: Reuters, Bloomberg, Financial Times, etc. but also the attention of our detractors.

Major shifts in commodity market supply and demand balances have occurred over the past few years. However, these shifts alone are insufficient explanation of the rapid increase in price volatility affecting a wide range of commodities over the last half decade. Research and analyses increasingly support the view that the greater involvement of financial investors and their increased investments in commodities as financial assets have altered the functioning of commodity markets.  The rise of high frequency trading marks a new step in the financialization of commodity market. Looking at intra-day and high frequency data allows getting a better grasp of some recent technical developments that have affected the commodity markets.  

The most irate comment on our new findings has been without contest "Streetwise Professor", aka Craig Pirrong, in an inflammatory and even defamatory blog entry. John Kemp, a commodity analyst, rebuked his conclusion in a well written column published in The Guardian and supported our empirical findings. Nicolas and I are good guys according to a comment left on the specialized financial blog Zerohedge, and an appeal for a dialogue with our detractor has remained unanswered so far…

Let's hope new policies could be derived from our findings…

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