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Integration of Commodity Derivative Markets: Has It Gone Too Far?

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Commodities, Energy and Environmental Finance

Part of the book series: Fields Institute Communications ((FIC,volume 74))

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Abstract

We examine the impact of two financial crises on commodity derivative markets: the subprime crisis and the bankruptcy of Lehman Brothers. These crises are “external” to the commodity markets because they occurred in the financial sphere. Still, because commodity markets are now highly integrated with each other and with other financial markets, such events could have had an impact. In order to fully comprehend this possible impact, we rely on tools inspired by the graph theory that allow for the study of large databases. We examine the daily price fluctuations recorded in 14 derivative markets from 2000 to 2009 in three dimensions: the observation time, the space dimension—the same underlying asset can be traded simultaneously in two different places—and the maturity of the transactions. We perform an event study in which we first focus on the efficiency of the price shock’s transmission to the commodity markets during the crises. Then we concentrate on whether the paths of shock transmission are modified. Finally, relying on the measure proposed by Bonacich (Am J Sociol 92(5):1170–1182, 1987) for social networks, we focus on whether the centrality of the price system changes.

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Notes

  1. 1.

    Taking the square of ρ ij (t) has no impact on the results (computations are available on request).

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Acknowledgements

This paper is based on work supported by the Chair Finance and Sustainable Development and the FIME Research Initiative. Comments by the referees and the audience at the 7th Financial Risks International Forum and at the 31st AFFI conference are gratefully acknowledged. The same is true for fruitful remarks from the reviewer of this special volume and from Michel Robe.

Author information

Authors and Affiliations

  1. PSL, Université Paris-Dauphine, Paris, France

    Delphine Lautier & Julien Ling

  2. EPFL, Lausanne, Switzerland

    Franck Raynaud

Authors
  1. Delphine Lautier
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  2. Julien Ling
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  3. Franck Raynaud
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Corresponding author

Correspondence to Julien Ling .

Editor information

Editors and Affiliations

  1. EDF R&D, Clamart Cedex, France

    René Aïd

  2. Department of Statistics and Applied Probability, University of California Santa Barbara, City, USA

    Michael Ludkovski

  3. ORFE Department, Princeton University, Princeton, New Jersey, USA

    Ronnie Sircar

Appendices

Appendix 1: Timelines Around the Events

1.1 Some Important Events Around the Subprime Crisis

Based on [4], News feeds, Wikipedia (Table 3).

Table 3 Important events around the subprime crisis (S denotes the date of the trigger of the crisis, on August 9th, 2008)
Full size table

1.2 Some Important Events Around Lehman Brothers Bankruptcy

Based on [4], News feeds, Wikipedia (Table 4).

Appendix 2: Additional Results

2.1 Robustness Checks

This section of the appendix is devoted to a sensitivity analysis. It provides the results obtained around the two events, with the different measures used in the analysis (length of the MST, survival ratios and allometric coefficients) when the rolling window is extended to 2 years instead of 1 year. The comparison shows that overall, the behavior remains qualitatively the same. As expected, compared with the 1-year rolling window, the 2-year window has a smoothing effect (Figs. 12, 13, and 14).

Table 4 Important events around Lehman Brothers bankruptcy (L denotes the date of Lehman Brothers default, on September 15, 2008)
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Fig. 12
figure 12

Normalized length in the spatial dimension and in 3D, around the events

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Fig. 13
figure 13

Survival ratios in the spatial dimension and in 3D, around the events

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Fig. 14
figure 14

Allometric coefficients in the spatial dimension and in 3D, around the events

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2.2 Evolution of the Markets Rankings by Centrality, Around the Events and Sector by Sector

2.2.1 Ranking by Centrality Measure in the Spatial Dimension, Around the Subprime Crisis (August 9, 2007) (Fig. 15)

Fig. 15
figure 15

Evolution of the ranks in the spatial dimension around the Subprime crisis. Subset (a) is for agricultural markets, subset (b) is for only 4 energy markets (for readability) and subset (c) is for financial markets

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2.2.2 Rankings by Centrality Measure in the Spatial Dimension, Around the Lehman Brothers Bankruptcy (September 15, 2008) (Fig. 16)

Fig. 16
figure 16

Evolution of the ranks in the spatial dimension, around the Lehman Brothers bankruptcy. Subset (a) is for agricultural markets, subset (b) is for only 4 energy markets (for readability) and subset (c) is for financial markets

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Lautier, D., Ling, J., Raynaud, F. (2015). Integration of Commodity Derivative Markets: Has It Gone Too Far?. In: Aïd, R., Ludkovski, M., Sircar, R. (eds) Commodities, Energy and Environmental Finance. Fields Institute Communications, vol 74. Springer, New York, NY. https://doi.org/10.1007/978-1-4939-2733-3_3

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