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1/ Some random thoughts on the reflexive impacts of commoditization of access in finance…
In other words, “what happens when we make something easy to invest in?"
In other words, “what happens when we make something easy to invest in?"
2/ In 1991, Goldman Sachs launched the Goldman Sachs Commodity Index (GSCI). By the early 2000s, commodity futures were an popular, emerging asset class for many financial institutions.
3/ Institutional investors were ravenous for exposure, and grew their exposure in different commodity index-related instruments from just $15b in 2003 to $200b by mid-2008.
4/ This raised some concern that price-insensitive buyers of commodities may cause unwarranted increases in prices and volatility.
http://www.hsgac.senate.gov//imo/media/doc/052008Masters.pdf?attempt=2
http://www.hsgac.senate.gov//imo/media/doc/052008Masters.pdf?attempt=2
5/ Tang and Xiong (2012) ( https://www.princeton.edu/~wxiong/papers/commodity.pdf) found:
- Greatly increasing price comovements between commodities after 2004
- In particular, non-energy names became more highly correlated with oil.
- Greatly increasing price comovements between commodities after 2004
- In particular, non-energy names became more highly correlated with oil.
6/ They also found that,
"The trading of index investors can act as a channel to spill volatility from outside financial markets on and across commodity markets."
"The trading of index investors can act as a channel to spill volatility from outside financial markets on and across commodity markets."
7/ But can commoditized access change the fundamental nature of the asset itself?
Erb, Harvey, and Viskanta (2020) discusses the growth of Gold ETFs and the shift of gold price sensitivity from real yield changes to supply-and-demand shifts.
Erb, Harvey, and Viskanta (2020) discusses the growth of Gold ETFs and the shift of gold price sensitivity from real yield changes to supply-and-demand shifts.
8/ So what else has been commoditized?
Target Date Funds have grown from $8 billion in 2000 to $2.3 trillion in 2019.
Parker, Schoar, and Sun (2020) ( https://www.nber.org/papers/w28028 ) argue that:
- TDF rebalancing drives contrarian flows
- Rebalancing flows impact stock prices
Target Date Funds have grown from $8 billion in 2000 to $2.3 trillion in 2019.
Parker, Schoar, and Sun (2020) ( https://www.nber.org/papers/w28028 ) argue that:
- TDF rebalancing drives contrarian flows
- Rebalancing flows impact stock prices
9/ And if TDFs are "price insensitive" rebalancers, can TDFs reduce price responses to asset-class-specific changes?
10/ @VincentDeluard (2020) makes a more salacious suggestion: the target date whale is moving markets.
https://blog.evergreengavekal.com/swimming-with-the-target-date-whale/
https://blog.evergreengavekal.com/swimming-with-the-target-date-whale/
11/ What else?
Is it possible Robin Hood commoditized access to options?
Hello, call option casino!
Is it possible Robin Hood commoditized access to options?
Hello, call option casino!
12/ What about smart beta and equity factors?
If the market crowds into the same basket (or risk factor) definitions, does that make the market less stable?
If the market crowds into the same basket (or risk factor) definitions, does that make the market less stable?
13/ This thread isn't driving towards any specific conclusion other than,
"If markets are reflexive why wouldn't structural shifts in supply and demand affect the underlying assets?"
And what happens when access to markets themselves have been commoditized?
FIN.
"If markets are reflexive why wouldn't structural shifts in supply and demand affect the underlying assets?"
And what happens when access to markets themselves have been commoditized?
FIN.
