A key determinant of commodity price Co-movement: The role of daily market liquidity

Yongmin Zhang, Shusheng Ding and Eric M. Scheffel

Economic Modelling, 2019, vol. 81, issue C, 170-180

Abstract: Daily price co-movement across different commodity classes and its key determinant are investigated in this paper. Using co-integration and Granger causality analysis, we identify a common liquidity factor which drives prices of five commodities (oil, silver, gold, corn, live cattle) to move along a common trend. When the market becomes more (less) liquid, all commodity prices tend to move up (down) in the same direction. As a result, such liquidity-driven price co-movement across different commodity classes is likely to generate aggregate price shocks and amplify inflation volatility. As a practical implication of our findings, policy makers ought to be able to draw valuable lessons from monitoring daily commodity liquidity dynamics as a timely bellwether for incipient inflation and to more effectively control inflation risk.

Keywords: Commodity price Co-Movement; Liquidity commonality; Granger test; Monetary policy (search for similar items in EconPapers)
JEL-codes: E30 F00 G00 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:81:y:2019:i:c:p:170-180

DOI: 10.1016/j.econmod.2019.01.004

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