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Abstract

The recent global food crisis has caused an increase in agricultural market volatility, raising important questions on the determinants of this instability. Many studies have analyzed this issue focusing on main factors affecting price volatility, as past volatility and trends, transmission across prices, oil price volatility, export concentration, stock levels and yields (Balcombe, 2010). Existing empirical literature identifies different drivers of volatility; among them, financialization and speculation are by far one of the most important. Indeed, with the introduction of agricultural commodity as an alternative asset class in investment portfolios, and the consequent increasing integration between commodity markets and major financial markets, there has been a growing convergence of risk-adjusted returns on assets class across markets, and an increase in the risk of volatility spillovers from outside to commodity markets due to portfolio rebalancing of institutional investors (Adams and Gluck, 2015). Since the beginning of the new millennium, in fact, there has been a steady flows of financial investments in commodities. As reported by Irwin and Sanders (2011), commodity investments have grown between 2003 and 2009 from 15 billion to 250 billions of dollars. Investments in these markets is made through different financial instruments, driven by different motivations: in futures, both for hedging and speculative purposes, and also in commodity index funds and hedge funds, mainly for portfolio diversification purposes. Increase in investing in the latter two types of investments, however, has been much stronger, compared to the past (Cheng et al. 2014). This process of massive increase in investments in commodities through financial instruments, knows as “commodity finanziarization”, has generated a gradual integration between commodities market and financial markets which, in turn, has risen spillover volatility between markets due to investors’ rebalancing of portfolio’s asset classes.

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