The Dynamics of Commodity Return Comovements

Abstract

We compare factor models with respect to their ability to explain commodity futures return
comovements. A simple one-factor model based on the rst principal component extracted
from a panel of commodity returns outperforms a macroeconomic model, and explains most
of the realized comovements. We nd that intersectoral correlations display more time
variations than intrasectoral correlations. Dissecting the evidence further, we nd that co-
movements are driven by the variation of the factor as opposed to exposure to it. Our results
cast doubt on the persistence of the eects of nancialization and emphasize the importance
of the dynamics of the factor variance.

Keywords: Commodity Markets, Comovement, Financialization, Factor Model

JEL Classification: G13, C38, F36, Q02