Futures Trading and the Excess Comovement of Commodity Prices

41 Pages Posted: 21 Dec 2012 Last revised: 14 Feb 2017

See all articles by Yannick Le Pen

Yannick Le Pen

Université Paris Dauphine

Benoît Sévi

University of Nantes

Date Written: February 15, 2017

Abstract

We empirically reinvestigate the issue of the excess co-movement of commodity prices initially raised in Pindyck and Rotemberg (1990). Excess co-movement appears when commodity prices remain correlated even after adjusting for the impact of fundamentals. We use recent developments in large approximate factor models to consider a richer information set and adequately model these fundamentals. We consider a set of eight unrelated commodities along with 184 real and nominal macroeconomic variables, from developed and emerging economies, from which nine factors are extracted over the 1993-2013 period. Our estimates provide evidence of time-varying excess co-movement which is only occasionally significant. We further show that speculative intensity is a driver of the estimated excess co-movement, as speculative trading is both correlated across the commodity futures markets and correlated with the futures prices. Our results can be taken as direct evidence of the significant impact of financialization on commodity-price cross-moments.

Keywords: commodity excess comovement hypothesis, factors model, heteroscedasticity-corrected correlation, commodity index, futures trading

JEL Classification: C22, C32, G15, E17

Suggested Citation

Le Pen, Yannick and Sévi, Benoît, Futures Trading and the Excess Comovement of Commodity Prices (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2191659 or http://dx.doi.org/10.2139/ssrn.2191659

Yannick Le Pen

Université Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
75775
France

Benoît Sévi (Contact Author)

University of Nantes ( email )

1, quai de Tourville BP
Nantes Cedex 1
Nantes, 44313
France

HOME PAGE: http://www.iemniae.univ-nantes.fr/sevi-b/0/fiche___annuaireksup/

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