Financial regulatory arbitrage and the financialization of commodities

Abstract

We explore the effects of financial regulatory arbitrage on commodity pricing. We examine two types of financial arbitrage: capital-control arbitrage, in which commodities are imported to circumvent capital controls and profit from disparities in interest rates between domestic and international markets, and dual-track interest-rate arbitrage, in which commodities are utilized as collateral to capitalize on domestic dual-track interest-rate spreads. Our findings demonstrate that both forms of arbitrage positively affect commodity price returns. However, they affect the inverse relationship between inventory and convenience yield differently. While capital-control arbitrage can either amplify or weaken this relationship, dual-track arbitrage makes it less negative.