IS FOOD FINANCIALIZED? YES, BUT ONLY WHEN LIQUIDITY IS ABUNDANT

In this paper, we investigate whether commodity index trader (CIT) positions help to explain the increase in the correlations between agricultural commodities and equities starting around 2008. Some argue institutional investors who invest both in stock and commodity markets demolish the borders between these two seemingly unrelated markets and increase correlations, a recent phenomenon known as financialization. Yet, some others argue recently correlations have decreased back to historical levels and the increase between 2008 and 2012 was merely due to a business cycle effect. Our results do not support one side at the expense of the other but rather shows that both factors are important in explaining the correlations between agricultural commodities and stocks. Furthermore, we find that CITs prefer to go back to their circle of competence under scarce liquidity and thus correlations decrease back to levels absent institutions. Hence, low liquidity is a significant obstacle inhibiting financialization to occur.

Ordu, B. M., Oran, A., & Soytas, U. (2018). Is food financialized? Yes, but only when liquidity is abundant. Journal of Banking & Finance, 95, 82-96.

 (*) EVIDENCE FROM AN EMERGING MARKET 

We investigate the effect of energy commodity price movements on market and electricity index returns in Turkey for the periods before, during, and after the year 2008. Although the Turkish economy is highly reliant on oil, we find that oil price does not lead either electricity or market indexes. This might be attributable to sluggish integration of financial markets in Turkey compared to developed markets. Natural gas price leads electricity index in the pre-2008 period. Its significance is reduced following the decline in natural gas usage in electricity production. This suggests that commodity dependence may be driving the link between commodity and asset prices in related sectors.

Ordu, B. M., & Soytaş, U. (2016). The relationship between energy commodity prices and electricity and market index performances: evidence from an emerging market. Emerging Markets Finance and Trade, 52(9), 2149-2164.

Our paper has two stages of analysis. First of all, we examine whether volatility spillover between US equity and commodity markets has significantly changed with the heavy influx of index traders in commodity derivatives markets, which is a phenomenon referred to as financialization. Given that previous findings show institutional traders enter into commodity markets at high liquidity episodes, in the second stage of our analysis, we investigate the particular impact of US quantitative easing policy on spillover between commodity and US stocks. Our results indicate that during financialization period, spillover from stocks to commodities have significantly increased for almost all commodities. More importantly, we show that quantitative easing is one of the underlying reasons for increasing volatility spillover between markets. Including interest rate, currency factors or default spread does not diminish the explicit role of quantitative easing on spillovers.

Ordu-Akkaya, B. M., & Soytas, U. (2020). Unconventional monetary policy and financialization of commodities. The North American Journal of Economics and Finance, 51, 100902.

The heavy influx of financial institutions into commodity markets is referred to as financialization of commodities and this phenomenon argues that financial institutions increase the connectedness between commodity and stock markets through simultaneous investing. In this paper, employing Treasury International Capital data by US Treasury to proxy for institutional investment, we investigate the role of foreign portfolio investors on increasing spillovers between commodity and stock markets. We include developed (G7) and emerging (top 10 emerging) countries in our analysis and results indicate that volatility spillover considerably increases during post-financialization episode. Moreover, the impact of foreign portfolio investment on the spillover is positive for 14 out of 16 countries, whilst controlling for business cycle, VIX and term spread. Therefore, supporting financialization phenomenon, we find that higher the foreign portfolio investment, higher the spillover between commodity and stock markets.

Ordu-Akkaya, B. M., & Soytas, U. (2020). Does foreign portfolio investment strengthen stock-commodity markets connection?. Resources Policy, 65, 101536.

 (*) BETWEEN SPOT AND FUTURES MARKETS  

In this paper, we investigate the role of open interest, trading volume and trading positions of trader groups on volatility spillover between futures and spot markets of two major commodities; oil and gold during the last two decades. The initial analysis including only spot and futures markets imply that the relationship is bi-directional for crude oil, and uni-directional for gold. Though, including open interest and trading volume enrich our results indicating open interest and spot markets are closely connected and trading volume provide cross-market information, which might suggest investors investing in both commodities make these markets informationally connected. Given the increasing presence of institutional investors in commodity markets during the sample period, we also check whether speculators lead to excess volatility in futures market as financialization proponents argue. Findings depict that actually the spillover is from futures market to speculators’ positions implying volatility in commodity markets is not attributable to speculators in the last two decades.

Ordu-Akkaya, B. M., Ugurlu-Yildirim, E., & Soytas, U. (2019). The role of trading volume, open interest and trader positions on volatility transmission between spot and futures markets. Resources Policy, 61, 410-422.

 (*) NEW EVIDENCE FROM NONLINEAR COINTEGRATION ANALYSIS 

The purpose of this paper is to examine non-linear and cointegrating relationships between monetary policy uncertainty, investor sentiment, and stock market for the US economy, via controlling for potential macroeconomic risk factors. We mainly utilize non-linear autoregressive distributed lag (NARDL) approach and findings support an existing cointegration between the aforementioned variables. Our results also suggest that there is a bidirectional and negative relationship between US stock market performance and monetary policy uncertainty in the short-run. Furthermore, the effect of monetary policy uncertainty on investor sentiment is significantly negative and not strongly asymmetric in the long-run. On the other hand, in the short-run, increasing investor sensitivity to macroeconomic shocks strongly increases monetary policy uncertainty, while reducing sensitivity does not have a significant impact on the monetary policy uncertainty. Finally, we find a positive and bi-directional relationship between stock prices and investor sentiment both in the short- and long-run. In the long-run, decreasing investor sensitivity to macroeconomic fluctuations (becoming more optimistic) has a greater positive influence on stock prices than a negative influence on stock prices, since investors are becoming more pessimistic. Implications from our analysis are important to policy makers and investors for determining effective economic policy decisions and proper investment strategies.

Ugurlu‐Yildirim, E., Kocaarslan, B., & Ordu‐Akkaya, B. M. (2021). Monetary policy uncertainty, investor sentiment, and US stock market performance: New evidence from nonlinear cointegration analysis. International Journal of Finance & Economics, 26(2), 1724-1738.

 (*)  A PERSPECTIVE FROM MARKET VS. BANK-BASED EMERGING ECONOMIES 

In this paper, we investigate if negative effect of geopolitical risk on economic growth reduces with the financial structure of emerging economies. Although previous studies do not find market-based structure to boost economic growth, we cast a light upon why countries still opt for shifting to that structure. We mainly utilize panel autoregressive distributed lag (ARDL) for the period between 1985 and 2021 and employ country-based geopolitical risk (GPR) indices for 15 emerging markets. Findings depict that market-based structure reduces negative impact of geopolitical risk on economic growth, which might be attributed to increasing transparency and hence investors feeling less hesitant in investing market-based economies. On the other hand, we also show that market-based system reduces the adverse effects of GPR on consumption, whereas bank-based system has the same effect on investment growth in the long-run. Therefore, our paper asserts that the financial system is not irrelevant in terms of growth perspective, if the geopolitical risk is a key factor for an emerging country. 

Ugurlu-Yildirim, E., & Ordu-Akkaya, B. M. (2022). Does the impact of geopolitical risk reduce with the financial structure of an economy? A perspective from market vs. bank-based emerging economies. Eurasian Economic Review, 1-23.