Increasing Trends in the Excess Comovement of Commodity Prices

New mimeo from Hitotsubashi University: In this paper, we generalize the model of excess comovement originated by Pindyck and Rotemberg (1990), and extended by Deb, Trivedi, and Varangis (1996), to investigate whether and how excess correlations among seemingly unrelated commodity returns have increased recently. To this end, we develop the STDCC model to capture the long-run trends and the
short-run dynamics of excess comovement. Using the commodity return data from 1983 to 2011, in all pairs of agricultural raw materials, beverages, metals , and oil, we fi nd gradually increasing long-run trends since 2000. We also confi rm that the increasing trend in excess comovement is robust and not an artifact of the recent financial crisis nor changes in the e ffects of common macroeconomic factors. Finally, we show that the dynamics of excess comovements in off -index commodities is quite diff erent, which may be taken as additional evidence for the financialization of commodities.