Common Factors in Commodity Futures Curves
67 Pages Posted: 1 Feb 2015 Last revised: 13 Dec 2017
Date Written: December 8, 2017
Literature studying comovement in commodity prices provides mixed evidence for whether commodity markets are segmented or driven by common factors. We provide a joint framework to study comovement across 24 of the most traded commodities over 20 years. The framework benefits from using the whole commodity futures curve, not just the nearest futures contract. Using all curve data we find that there is a strong comovement, though this is mostly due to sector commonalities. Furthermore, the importance of a common market factor is overestimated when using only the nearest futures data. Both these findings shed light on the contradicting conclusions in existing literature. Additionally we find that the importance of the common factors varies over time, with a stronger factor structure arising in recent years.
Keywords: Commodity futures prices, comovement, term structure, dynamic Nelson Siegel model
JEL Classification: G12, G13
Suggested Citation: Suggested Citation