Commodity Financialization: Risk Sharing and Price Discovery in Commodity Futures Markets

We theoretically study how commodity financialization affects trading behavior, prices and welfare through affecting risk sharing and price discovery in futures markets. In our model, the general equilibrium feature makes financial traders either provide or demand liquidity in the futures market, depending on the information environment. Consistent with recent evidence, commodity financialization reduces the futures price bias through broadening risk sharing and injecting information into the market. Each financial trader loses and final-end commodity consumers benefit in the process of commodity financialization. Commercial hedgers can either lose or win, and their welfare improves with commodity financialization only when the number of active financial traders takes intermediate values.