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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.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 13048.

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Length: 30 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:eti:dpaper:13048

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  1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  2. Robert-Paul Berben & W. Jos Jansen, 2003. "Comovement in international equity markets: A sectoral view," Finance, EconWPA 0310001, EconWPA.
  3. Deb, Partha & Trivedi, Pravin K & Varangis, Panayotis, 1996. "The Excess Co-movement of Commodity Prices Reconsidered," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(3), pages 275-91, May-June.
  4. Annastiina Silvennoinen & Susan Thorp, 2010. "Financialization, Crisis and Commodity Correlation Dynamics," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 267, Quantitative Finance Research Centre, University of Technology, Sydney.
  5. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 100(403), pages 1173-89, December.
  6. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  7. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, Elsevier, vol. 62(2), pages 211-228, June.
  8. Erkko Etula, 2009. "Broker-dealer risk appetite and commodity returns," Staff Reports 406, Federal Reserve Bank of New York.
  9. Harrison Hong & Motohiro Yogo, 2011. "What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?," NBER Working Papers 16712, National Bureau of Economic Research, Inc.
  10. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  11. Kumar, Manmohan S. & Okimoto, Tatsuyoshi, 2011. "Dynamics of international integration of government securities' markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 142-154, January.
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