Correlation in Commodity Futures and Equity Markets Around the World: Long-Run Trend and Short-Run Fluctuation
41 Pages Posted: 26 Feb 2012
Date Written: November 16, 2011
Addressing the view that recent hikes in the commodity-equity correlation will only be temporary, this paper differentiates itself from previous studies in two aspects: It examines the long-run trends and the short-run fluctuations of the commodity-equity correlation, and it does so to indices from 45 equity markets. Of them, 32 demonstrate an upward long-run trend in their correlations with the commodity futures market throughout the last decade, and 43 have had their correlation trends upswing sharply during the recent financial/economic turmoil. Conditional correlations of 39 equity markets with the commodity futures market move towards or above their long-run trends when volatilities of these equity markets increase. Our results constitute compelling evidence that the attenuating diversification benefits of commodity futures are a long-run and world-wide phenomenon.
Keywords: Commodity futures, Equity, Conditional correlation, Long-run trend
JEL Classification: G01, G11, C22
Suggested Citation: Suggested Citation