Co-movement Of Commodity Prices Research Articles

Modelling nonlinearities in commodity prices using smooth transition regression models with exogenous transition variables

This paper investigates the nonlinearities in commodity prices using smooth transition regression (STR) models. What distinguishes this paper from the majority of the studies in the smooth transition literature is its use of exogenous transition variables, in addition to the standard autoregressive lags of the dependent variable, in modelling the regime switching behavior of commodity prices. Two exogenous transition variables were found successful in capturing the regime switching behavior of commodity prices: inflation rate and oil price. Inflation rate was capable of capturing the early dynamics (between 1900 and 1950) of the commodity index whereas oil price captured the late ones (between 1970 and 2007). This result motivates the use of common exogenous threshold variables in regime switching models in general and, in particular, the use of inflation and oil price in the STR model when applied to an index of commodity prices. The paper also provides further insight on the issue of co-movement of commodity prices by classifying individual commodities into groups according to their border price (an issue that has been ignored in previous studies on commodity prices), and then trying to find the best common transition variable that can explain the dynamic behavior of each group. The results show that, for traded commodities, individual price series recorded on a free on board basis are driven by macroeconomic news in the exporting country. On the other hand, individual price series recorded on a cost and freight basis are driven by oil price and macroeconomic news variables in the importing country.

Common dynamics of nonenergy commodity prices and their relation to uncertainty

The purpose of this article is to improve the empirical evidence on commodity prices in various dimensions. First, we attempt to identify the extent of comovements in 44 monthly nonenergy commodity price series in order to ascertain whether the increase in comovement is a recent term phenomenon. Second, we attempt to determine the role of uncertainty in determining comovements among nonenergy prices in the short run. We diagnose the overall comovement using a dynamic factor model estimated by principal components. A factor-augmented vector autoregressive approach is used to assess the relationship of fundamentals, financial and uncertainty variables with the comovement in commodity prices. We find a greater synchronization among raw materials since December 2003. Since that date, uncertainty has played an important role in determining short-run fluctuations in nonenergy raw material prices.

Increasing Trends in the Excess Comovement of Commodity Prices

Increasing Trends in the Excess Comovement of Commodity Prices

The Comovement in Commodity Prices: Sources and Implications

We present a simple macroeconomic model with a continuum of primary commodities used in the production of the final good, such that the real prices of commodities have a factor structure. One factor captures the combined contribution of all aggregate shocks which have no direct effects on commodity markets other than through general equilibrium effects on output, while other factors represent direct commodity shocks. Thus, the factor structure provides a decomposition of underlying structural shocks. The theory also provides guidance on how empirical factors can be rotated to identify the structural factors. We apply factor analysis and the identification conditions implied by the model to a cross-section of real non-energy commodity prices. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis suggests that commodity-related shocks have generally played a limited role in global business cycle fluctuations.

The Comovement in Commodity Prices: Sources and Implications

We present a simple macroeconomic model with a continuum of primary commodities used in the production of the final good, such that the real prices of commodities have a factor structure. One factor captures the combined contribution of all aggregate shocks which have no direct effects on commodity markets other than through general equilibrium effects on output, while other factors represent direct commodity shocks. Thus, the factor structure provides a decomposition of underlying structural shocks. The theory also provides guidance on how empirical factors can be rotated to identify the structural factors. We apply factor analysis and the identification conditions implied by the model to a cross-section of real non-energy commodity prices. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis suggests that commodity-related shocks have generally played a limited role in global business cycle fluctuations.

Increasing Trends in the Excess Comovement of Commodity Prices

In this paper, we investigate whether excess correlations among seemingly unrelated commodity returns have increased recently, and if so, how they were achieved. To this end, we generalize the model of excess comovement, originated by Pindyck and Rotemberg (1990) and extended by Deb, Trivedi, and Varangis (1996), to develop the smooth-transition dynamic conditional correlation (STDCC) model that can capture long-run trends and short-run dynamics in excess comovements. Using commodity returns data from 1983 to 2011, we find that significant increasing long-run trends in excess comovements have appeared since around 2000 in all pairs of agricultural raw materials, beverages, metals, and oils. We confirm that these increasing trends are robust and are not artifacts of the recent financial crisis or changes in the effects of common macroeconomic factors. Moreover, unlike the results above, we find no significant increasing trends in excess comovements among off-index commodity returns. Those findings provide additional evidence for the recent debates about the effect of financialization on commodity-return correlations.

Futures Trading and the Excess Comovement of Commodity Prices

We empirically reinvestigate the issue of the excess co-movement of commodity prices which was initially raised in Pindyck and Rotemberg (1990), and show that excess co-movement, when it exists, can be related to hedging pressure and speculative intensity in commodity futures markets. Excess co-movement appears when commodity prices remain correlated even after adjusting for the impact of common factors. While Pindyck and Rotemberg and the work that followed examined this issue using a relevant but arbitrary set of control variables, we use recent developments in large approximate factor models to consider a richer information set and adequatelymodel the “fundamentals”. We consider a set of eight unrelated commodities along with 184 real and nominal macroeconomic variables 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, even after controlling for heteroscedasticity. Interestingly, excess co-movement is mostly significant in recent years, where we have seen a large increase in commodity trading. However, we show that this increase in trading activity alone, measured through open interest in commodity markets, has no explanatory power for the excess co-movement. Conversely, measures of hedging and speculative activity explain almost 80% of the estimated excess co-movement, thereby showing the considerable impact of financialization on commodity-price correlations, and more generally the significant of traders’ actions on cross-moments.

Primary commodity prices: Co-movements, common factors and fundamentals

The behavior of commodities is critical for developing and developed countries alike. This paper contributes to the empirical evidence on the co-movement and determinants of commodity prices. Using nonstationary panel methods, we document a statistically significant degree of co-movement due to a common factor. Within a Factor Augmented VAR approach, real interest rate and uncertainty, as postulated by a simple asset pricing model, are both found to be negatively related to this common factor. This evidence is robust to the inclusion of demand and supply shocks, which both positively impact on the co-movement of commodity prices.

Commodity Booms and Busts

Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, because market participants are likely to respond by increasing inventory holdings and investing in new technologies, we see no reason to expect an increase in the frequency of dramatic commodity booms and busts.

Is there co-movement of agricultural commodities futures prices and crude oil?

Even though significant attempts have appeared in literature, the current perception of co-movement of commodity prices appear inadequate and static. In particular we focus on price movements between crude oil futures and a series of agricultural commodities and gold futures. A comparative framework is applied to identify changes in relationships through time and various cointegration methodologies and causality tests are employed. Our results indicate that co-movement is a dynamic concept and that some economic and policy development may change the relationship between commodities. Furthermore we show that biofuel policy buffers the co-movement of crude oil and corn futures until the crude oil prices surpass a certain threshold.

On the excess co-movement of commodity prices—A note about the role of fundamental factors in short-run dynamics

Since the influential paper by Pindyck and Rotemberg (1990) [The excess co-movement of commodity prices. The Economic Journal 100, 1173–1189], there is a common belief that prices of unrelated commodities tend to move together in excess of what can be explained by fundamentals. In this paper, we consider monthly data of 51 commodities from 1980 to 2008 to confirm that raw resources exhibit co-movement at high frequencies. Nonetheless, focusing on oil and six metal prices, we present evidence that the high level of correlation between cycles of commodity prices can be explained to a large extent by common shocks to inventory levels. Once the influences of supply and demand are filtered out, it appears that the links between commodity prices are rather loose.

On the Comovement of Commodity Prices

We present strong evidence against the excess‐comovement hypothesis—that the prices of commodities move together beyond what can be explained by fundamentals. Prior studies employ broad macroeconomic indicators to explain common price movements, and potentially correlated fundamentals are not controlled for. We use inventory and harvest data to fit a partial equilibrium model that more effectively captures the variation in individual prices. The model explains the majority of the comovements among commodities with high price correlation, and all of the comovements among those with marginal price correlation. Common movements in supply factors appear to play an important role in the observed comovements in commodity prices.

The Myth of Co-Moving Commodity Prices

There is a common perception that the prices of unrelated commodities move together. This paper re-examines this notion, using a measure of co-movement of economic time series called concordance. Concordance measures the proportion of time that the prices of two commodities are concurrently in the same boom period or same slump period. Using data on the prices of several unrelated commodities, the paper finds no evidence of co-movement in commodity prices. The results carry an important policy implication, as the study provides no support for earlier claims of irrational trading behaviour by participants in world commodity markets.

Portfolio diversification and excess comovement in commodity prices

We examine excess comovement in commodity prices and the extent to which this can be explained by the role of commodities in portfolio diversification. We estimate the proportion of investor wealth that should be allocated to commodities in order to maximize expected utility over time and examine whether periods of significant investment in commodities are correlated with excess comovement in commodity prices. Using the Goldman Sachs Commodity Index we find that commodities should form a large part of the optimal portfolios of US investors. However, while this result is robust to the level of risk aversion, it is not robust to the time period considered. We find that commodities only offer statistically significant increases in expected utility during the commodity booms of the early 1970s and the early 1990s. Interestingly, the significance of the commodity weight in the optimal portfolio corresponds to periods when there is also excess comovement in unrelated commodity prices. These findings suggest that commodities per se are treated as an investment class and apparently irrational excess comovement in commodity prices occurs when it is optimal for investors to hold commodities in their portfolios.

The Myth of Comoving Commodity Prices

There is a common perception that the prices of unrelated commodities move together. This paper re-examines this notion, using a measure of comovement of economic time series called concordance. Concordance measures the proportion of time that the prices of two commodities are concurrently in the same boom period or same slump period. Using data on the prices of several unrelated commodities, the paper finds no evidence of comovement in commodity prices. The results carry an important policy implication, as the study provides no support for earlier claims of irrational trading behavior by participants in world commodity markets.

The Myth of Comoving Commodity Prices

There is a common perception that the prices of unrelated commodities move together. This paper re-examines this notion, using a measure of comovement of economic time series called concordance. Concordance measures the proportion of time that the prices of two commodities are concurrently in the same boom period or same slump period. Using data on the prices of several unrelated commodities, the paper finds no evidence of comovement in commodity prices. The results carry an important policy implication, as the study provides no support for earlier claims of irrational trading behavior by participants in world commodity markets.

The excess comovement of commodity prices revisited

It is commonly held that commodity prices have a tendency to comove over time due to the effects of microeconomic influences which are common to all commodity prices. In this paper we present a conceptual framework for the identification and testing of the excess comovement hypothesis, i.e. price correlation over and above that which can be explained by microeconomic determinants. We find previous approaches to be deficient in important respects and these deficiencies may explain the contrasting results that have been obtained. Our empirical analysis suggests that excess comovement occurs only infrequently in monthly time series. Moreover, the results cast doubt on the existence of commodity price comovement.

The Excess Co-Movement of Commodity Prices

MIT's Center for Energy Policy Research and National Science Foundation, SES-8618502 and SES-8619004