Futures Trading and the Excess Co-movement of Commodity Prices

Yannick Le Pen () and Benoît Sévi
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Yannick Le Pen: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We empirically reinvestigate the issue of the excess co-movement of commodity prices initially raised in Pindyck and Rotemberg (1990). Excess co-movement appears when commodity prices remain correlated even after adjusting for the impact of fundamentals. We use recent developments in large approximate factor models to consider a richer information set and adequately model these fundamentals. We consider a set of eight unrelated commodities along with 184 real and nominal macroeconomic variables, from developed and emerging economies, from which nine factors are extracted over the 1993–2013 period. Our estimates provide evidenceof time-varying excess co-movement which is particularly high after 2007. Wefurther show that speculative intensity is a driver of the estimated excess comovement, as speculative trading is both correlated across the commodity futures markets and correlated with the futures prices. Our results can be taken as direct evidence of the significant impact of financialization on commodity-price crossmoments.

Keywords: Commodity excess co-movement hypothesis; Factor model; Heteroscedasticity-corrected; correlation; Commodity index; Futures trading (search for similar items in EconPapers)
Date: 2018
Note: View the original document on HAL open archive server: https://hal.science/hal-01731459v1
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Published in Review of Finance, 2018, 22 (1), pp.381-418. ⟨10.1093/rof/rfx039⟩

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Related works:
Working Paper: Futures Trading and the Excess Comovement of Commodity Prices (2013)
Working Paper: Futures trading and the excess comovement of commodity prices (2013)
Working Paper: Futures Trading and the Excess Comovement of Commodity Prices (2013)
Working Paper: Futures trading and the excess comovement of commodity prices (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01731459

DOI: 10.1093/rof/rfx039

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