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Increasing Trends in the Excess Comovement of Commodity Prices

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  • OHASHI Kazuhiko
  • OKIMOTO Tatsuyoshi

Abstract

In this paper, we investigate whether excess correlations among seemingly unrelated commodity returns have increased recently, and if so, how they were achieved. To this end, we generalize the model of excess comovement, originated by Pindyck and Rotemberg (1990) and extended by Deb, Trivedi, and Varangis (1996), to develop the smooth-transition dynamic conditional correlation (STDCC) model that can capture long-run trends and short-run dynamics in excess comovements. Using commodity returns data from 1983 to 2011, we find that significant increasing long-run trends in excess comovements have appeared since around 2000 in all pairs of agricultural raw materials, beverages, metals, and oils. We confirm that these increasing trends are robust and are not artifacts of the recent financial crisis or changes in the effects of common macroeconomic factors. Moreover, unlike the results above, we find no significant increasing trends in excess comovements among off-index commodity returns. Those findings provide additional evidence for the recent debates about the effect of financialization on commodity-return correlations.

Suggested Citation

  • OHASHI Kazuhiko & OKIMOTO Tatsuyoshi, 2013. "Increasing Trends in the Excess Comovement of Commodity Prices," Discussion papers 13048, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:13048
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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