The goal of the first part of this chapter is threefold: (a) to introduce the term structure of forward/futures commodity prices, the contango/backwardation duality and the notion of rolling yield as it pertains to trading through commodity indexes; (b) to use principal component analysis and the computation of equity and commodity “betas” to provide empirical evidence of the dramatic changes which occurred in the mid-2000s; (c) finally, to review the major arguments which have been put forth in the debate over the financialization of these markets. While conspicuously absent from some of the English language dictionaries, the word financialization has been widely used to describe the increasing role of institutional investors in the commodity markets. Using econometric data analyses for the purpose of illustration, we concentrate on futures price data from the post-2004 period during which the commodity markets experienced a significant influx of new financial investors. As far as we know, mathematical models attempting to reproduce or illustrate (let alone explain) the empirical observations at the core of the debate are few and far between. As a result, our approach remains mostly descriptive of the data which have been used to back up the claims of the various sides of the argument. The originality of our contribution, if any, is the discussion of a new generation of roll yield maximizing commodity indexes, the empirical analysis of the term structure of open interest, and the possible connections between the two.
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