Integration of commodity derivative markets: Has it gone too far?

couverture cahier 63 lautierby Delphine Lautier, Julien Ling and Franck Raynaud

We examine the impact of two financial crises on commodity derivative markets: the subprime crisis and the bankruptcy of Lehman Brothers. These crises are “external” to the commodity markets because they occurred in the financial sphere. Still, because commodity markets are now highly integrated with each other and with other financial markets, such events could have had an impact. In order to fully comprehend this possible impact, we rely on tools inspired by the graph theory that allow for the study of large databases. We examine the daily price fluctuations recorded in 14 derivative markets from 2000 to 2009 in three dimensions: the observation time, the space dimension – the same underlying asset can be traded simultaneously in two different places – and the maturity of the transactions. We perform an event study in which we first focus on the efficiency of the price shock’s transmission to the commodity markets during the crises. Then we concentrate on whether the paths of shock transmission are modified. Finally, relying on the measure proposed by Bonacich (1987) for social networks, we focus on whether the centrality of the price system changes.

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