Co-Movement between Commodity and Equity Markets Revisited - an Application of the Thick Pen Method

Abstract

This paper analyses interdependence between the returns of a number of energy and
non-energy commodities on the one hand and equities on the other based on Thick Pen
Transform (TPT) methods: (i) Thick Pen Measure of Association (TPMA) and (ii) Multi-
Thickness Thick Pen Measure of Association (MTTPMA). These metrics can be used to
capture time-varying co-movement and co-movement across different time scales: this facilitates
the analysis of the short-term and long-term features of the time series using both
stationary/non-stationary data. Among our key findings is that, when considering longterm
co-movement, energy index futures show an increase in co-movement with equities since
the beginning of the financialisation period. There are asymmetric effects in cross-scale comovement
between various commodities and equities. The weak co-movement between equity
and off-index futures, livestock and soybean-based commodities indicates diversification benefits
for both short-term and long-term investors.

Keywords: Co-movement, financialisation, thick pen measure, commodity markets, equity markets

JEL Classification: C14, G12, G15, Q02