Network Structures and Dynamics in Equity and Commodity Futures Markets

Abstract

Over the last decade, commodity futures have been increasingly considered as an asset class capable of providing high potential for equity risk diversification, particularly during financial crises and in presence of downturns in stock markets. Indeed, commodity futures generally offer rather high returns with relatively low volatility and, most importantly, low correlation with stocks and bonds. However, recent studies have demonstrated the arising of some linkages between commodity futures markets and equity markets, which have progressively become more interconnected to each other. The financialization of commodity markets may result in a decrease of the diversification benefits from the inclusion of commodity futures into stock portfolios. This dissertation aims to investigate the existence and structure of these interaction between equity and the commodity futures markets. In order to do so, we will use the models and techniques developed within network theory, a field of mathematics that tries to describe the behaviour of complex systems of interactions. The first part of this work introduces the concept of network and its most important properties, along with a general review of the existing literature on the topic of networks in finance. The second part presents the basic notions related to commodities and futures trading, introducing the phenomenon of the financialization of commodity markets. The third chapter explains which data have been collected and the methodologies used to analyse them. The fourth chapter displays the results of our core analysis and the conclusion that we can draw from them.