On the Comovement of Commodity Prices

Chunrong Ai, Arjun Chatrath and Frank Song

American Journal of Agricultural Economics, 2006, vol. 88, issue 3, 574-588

Abstract: 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. Copyright 2006, Oxford University Press.

Date: 2006
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