Does the stock market drive herd behavior in commodity futures markets?

This paper contributes to the debate on commodity financialization by extending tests of herd behavior to commodity futures markets. Utilizing a regime-switching model, we test the presence of herd behavior in a number of commodity sectors including energy, metals, grains and livestock during the lo...

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Bibliographic Details
Published in:International review of financial analysis 2015-05, Vol.39, p.32-44
Main Authors: Demirer, Rıza, Lee, Hsiang-Tai, Lien, Donald
Format: Article
Language:English
Subjects:
Commodities
Commodity financialization
Commodity markets
Economic models
Futures market
Herd behavior
Markov switching
Organizational behavior
Return dispersion
Securities markets
Studies
Volatility
Zoos
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Summary:This paper contributes to the debate on commodity financialization by extending tests of herd behavior to commodity futures markets. Utilizing a regime-switching model, we test the presence of herd behavior in a number of commodity sectors including energy, metals, grains and livestock during the low and high market volatility states. We find significant evidence of herd behavior in grains only during the high volatility state. We also find that large price movements in the energy and metal sectors significantly contribute to herd behavior in the market for grains. Finally, we find no significant effect of the stock market on herd behavior in the commodity futures market. Our findings in general do not support the much debated commodity financialization hypothesis. •We extend tests of herd behavior to commodity futures markets using a Markov-Switching methodology.•Evidence of herd behavior in Grains is found during the high volatility regime only.•Large price movements in the Energy and Metals sectors contribute to herd behavior in the market for Grains.•No significant herding effect of the stock market is observed on commodities.•The findings provide support against the commodity financialization hypothesis.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2015.02.006