Dr. Ronnie Sircar (Princeton University)

Title: A Feedback Model for the Financialization of Commodities Prices

Abstract: Tang and Xiong (2009) discuss the financial markets as a result of increased index investing activity in the past decade. They find empirical evidence of increased exposure of commodities prices to shocks to other asset classes. We build a feedback model to try and capture some of these effects in which traditional economic demand for a commodity, oil say, is perturbed by the influence of portfolio optimizers. The analysis reveals correlation effects proportional to the long or short positions of the investors, along with a lowering of volatility.