Financialisation Impacting Diversification? Evidence from Indian Equity & Commodity Markets

Abstract

Investors are constantly looking at diversification of risks by combining equities with other assets in their portfolio. Apart from fixed income securities and real estate related instruments, commodities are also being increasingly used as a portfolio diversification strategy. But the overwhelming presence of financial institutions and funds in the commodity markets has resulted in financialisation of commodity markets leading to a greater correlation between equities and commodities especially during recession. This has lead to a reduction in diversification benefits. The paper attempts to study the diversification benefits of investing both in Indian commodities and equities markets in different economic environments using VAR Impulse Response Functions with an aim to find out whether financialization exists. The research found that there was absence of interdependence between the Indian equity and commodities markets which offered a good opportunity for diversification. Also the equities market and commodities market during recession were totally decoupled which showed that the financialization was not present in Indian commodities market and there was a greater scope for diversification during the recession.