151. Commodities as Collateral
- Author
-
Ke Tang, Haoxiang Zhu, Sloan School of Management, and Zhu, Haoxiang
- Subjects
Convenience yield ,Economics and Econometrics ,050208 finance ,Theory of storage ,Collateral ,Yield (finance) ,05 social sciences ,Commodity ,International economics ,Monetary economics ,Pledge ,ComputingMilieux_GENERAL ,Accounting ,0502 economics and business ,Economics ,Financialization ,050207 economics ,Constraint (mathematics) ,Finance ,Capital control - Abstract
We propose and test a theory of using commodities as collateral for financing. Under capital control and collateral constraint, investors import commodities and pledge them as collateral to earn higher expected returns. Higher collateral demands increase commodity prices and make the inventory -- convenience yield relation less negative. Our model illustrates these equilibrium effects and suggests that the violation of covered interest-rate parity is a proxy for collateral demands. Evidence from eight commodities in China and developed markets supports the theoretical predictions. Our findings complement the theory of storage and provide new insights into the financialization of commodity markets.
- Published
- 2015