The Theory of Normal Backwardization Financialization of the Futures Markets

Abstract

Over the past twenty years there has 1 been a large inflow of investment capital into commodity futures markets-the financialization of commodities. This chapter analyses the behavior of commodity futures contract returns before and since finalization of the markets. We believe that Professor Gordon C. Rausser's research in the 1970s contributed to the dramatic inflow of speculative investment into commodity futures, because he showed there were possible profits to be made "right at the edge of randomness" with computerized trading rules. Using the methodology in Carter, Rausser and Schmitz (1983) we find that the financialization impacted the Keynesian risk premiums in the futures market, as the market became over-crowded with speculative money.