Untangling systemic risk in financialized commodity markets - Julien Ling.

Systemic risk is a multifaceted concept that is of crucial importance for regulators. In order to ensure financial stability, they need to properly assess this risk, preventing financial shocks from affecting the real economy. In this study, we evaluate the extent to which the financialization of commodity markets contributes to systemic risk. We consider a system consisting of both commodity futures and financial markets in a sparse Vector AutoRegression (VAR) framework. It allows to distinguish two temporalities of systemic risk: we can assess "systematic" risk (integration) and propagation risk. In particular, we can identify which markets are influential in systemic risk and thus conduct a more in-depth investigation if necessary. Since we assume sparsity in the parameter matrices, we can rely on an algorithm using LASSO. In a static analysis, in the spatial dimension, we find that sectors are separated, except for metals and finance. Including the maturity dimensions proves necessary, as they connect all the sectors and thus cause the integration of the whole system. In our dynamic analysis, we focus on major financial events. We find that integration has been building up, was prominent and very high around each of these events between commodities and financial assets and among commodities, making common shocks a realistic possibility.