The Business Cycle and the Correlation Between Stocks and Commodities
25 Pages Posted: 16 Feb 2012 Last revised: 10 May 2013
Date Written: March 26, 2013
Measured over long horizons, the correlation between stocks and commodities is close to zero. However, it varies widely over time. Using historical data extending back to 1960 we study the stock-commodity correlation and show: (1) stock-commodity correlation has a business cycle component: it is higher during periods of economic weakness. (2) The same pattern is observed in the average intra-commodity correlation. Our results are consistent with recession-increased risk aversion causing investors to treat all risky assets the same, and also with firms adjusting variable input use more quickly during tough times. (3) This business cycle effect can explain the spikes in the stock-commodity correlation in the early 1980s and the late 2000s. (4) The link between stock-commodity correlation and business cycle is stronger for industrial commodities than for agricultural commodities.
Keywords: Stock-Commodities correlation, Business cycle
JEL Classification: E3, G1
Suggested Citation: Suggested Citation