Increasing Trends in the Excess Comovement of Commodity Prices
38 Pages Posted: 15 Feb 2016
Date Written: February 14, 2016
We investigate how the excess comovement of commodity prices, that is, the correlation in commodity returns after filtering out common fundamental shocks, has changed over the past three decades by developing the smooth-transition dynamic conditional correlation model that can capture long-run trends and short-run dynamics of correlation simultaneously. Using data from 1983 to 2011, we find that significant increasing longrun trends in excess comovement have appeared since around 2000. We confirm that these increasing trends are neither an artifact of the financial crisis after the bankruptcy of Lehman Brothers in September 2008 nor the time-varying sensitivities of commodity returns to common fundamental shocks. Moreover, we find that no significant increasing trends exist in the excess comovement among off-index commodities and that the surge of global demand alone cannot explain the increasing trends. These findings provide additional evidence for the timing and scope of the recent increasing commodity-return correlations that suggest the influence of the financialization of commodity markets starting around 2000.
Keywords: excess comovement, commodity return, time-varying correlation, smooth transition, regime change, financialization
JEL Classification: C32, C51, G15
Suggested Citation: Suggested Citation