Futures Trading and the Excess Co-movement of Commodity Prices[On the comovement of commodity prices]

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 evidence of time-varying excess co-movement which is particularly high after 2007. We further show that speculative intensity is a driver of the estimated excess co-movement, 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 cross-moments.