Does foreign portfolio investment strengthen stock-commodity markets connection?

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...

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Bibliographic Details
Published in:Resources policy 2020-03, Vol.65, p.101536, Article 101536
Main Authors: Ordu-Akkaya, Beyza Mina, Soytas, Ugur
Format: Article
Language:English
Subjects:
Business cycles
Capital
Commodities
Commodity markets
Crisis
Financial institutions
Financialization
Foreign investment
Foreign portfolio investment
Institutional investments
Institutional investors
Investment
Investors
Portfolio investments
Securities markets
Stock exchanges
Volatility
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Summary: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. •We examine the volatility spillover between selected stock and commodity markets via Diebold and Yilmaz methodology.•We proxy institutional investment through US Treasury TIC data.•We employ both developed (G7) and top 10 emerging countries in our analysis.•We show foreign portfolio investment strengthens connectedness between stock and commodity markets.
ISSN:0301-4207
1873-7641
DOI:10.1016/j.resourpol.2019.101536