Commodity price co-movement: heterogeneity and the time-varying impact of fundamentals[Oil price shocks and the stock market: evidence from Japan]

This paper extends the topical literature on the co-movement and determinants of primary commodity prices, by considering heterogeneity in commodities and time variation in the impact of fundamentals. We account for heterogeneity by employing a dynamic hierarchical factor model, which decomposes commodities into global and sectoral factors. Using a time-varying parameter factor augmented VAR model, we shock global and sector-specific factors over time. We present plausible impulse responses to demand shocks, real interest rate shocks and to elevated risks during the global financial crisis. We also identify that agricultural raw materials, food and metals respond heterogeneously to these shocks.