The Impact of Indexing in the Equity and Commodity Markets

Abstract

The impact of indexing is exceptionally well documented in the equity markets. The same has not yet been the case for the commodity markets. Our empirical results suggest that one should see increased price-pressure effects in the commodity markets with any increase in the popularity of index-based commodity investments. Our results also suggest one additional subtle point: when comparing price-pressure results across commodities, it is not just the amount of passive investment that matters; how risky the opportunity is for market professionals to take advantage appears to also be a very important factor.