Does foreign portfolio investment strengthen stock-commodity markets connection?

Soytaş, Uğur
The heavy influx of financial institutions into commodity markets is referred to as financialization of commodities and this phenomenon argues that financial institutions increase the connectedness between commodity and stock markets through simultaneous investing. In this paper, employing Treasury International Capital data by US Treasury to proxy for institutional investment, we investigate the role of foreign portfolio investors on increasing spillovers between commodity and stock markets. We include developed (G7) and emerging (top 10 emerging) countries in our analysis and results indicate that volatility spillover considerably increases during post-financialization episode. Moreover, the impact of foreign portfolio investment on the spillover is positive for 14 out of 16 countries, whilst controlling for business cycle, VIX and term spread. Therefore, supporting financialization phenomenon, we find that higher the foreign portfolio investment, higher the spillover between commodity and stock markets.