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Price Formation in Commodities Markets
Report

Price Formation in Commodities Markets

Financialisation and Beyond

Diego Valiante and Christian Egenhofer
CEP Press, 2013
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8

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Commodity prices always have been volatile; however, since the turn of the 21st century, the financial markets’ influence has meant that commodity-specific factors alone no longer explain this volatility. The Centre for European Policy Studies experts Diego Valiante and Christian Egenhofer analyze the developments that have made the prices of everyday commodities subject to the same shocks as prices in financial markets. They warn that this interconnection poses profound risks to the real economy. getAbstract finds that this comprehensive report on global commodities provides a solid introduction to – as well as an in-depth study of – a complex marketplace and recommends it to financial executives, policy makers and investors looking to understand how commodities trading has become so intertwined with the financial markets.

Summary

What Are Commodities?

“A commodity is a good with standard quality, verifiable ex ante, which can be traded on competitive and liquid global physical markets.” Every commodity has distinct features – such as seasonality, transportation and storage issues, and “substitutability” – that dictate the external factors affecting its cost and production. Commodities markets are fundamental to the world economy. They determine the cost of items essential to modern society, such as food, energy and raw materials.

Commodities trading has taken off since the start of the 21st century, fueled by rising globalization and liberalized regulation. Massive demand from emerging market countries, particularly from China, has contributed to this growth. Alongside traditional “commercial participants” such as the producers and sellers of commodities, “financial participants” have jumped into these markets, spurred by the development of electronic trading capabilities as well as the growing use of derivatives. The multiplying number of interactions between commodities markets and financial markets has caused great concern – most notably during the recent recession, when volatility...

About the Authors

Diego Valiante heads research at the European Capital Markets Institute, part of the Centre for European Policy Studies (CEPS), a think tank specializing in EU affairs. Christian Egenhofer, a visiting professor at several European universities, is a senior research fellow and head of CEPS’s energy and climate program.

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