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Is there excess co-movement of primary commodity prices? A co-integration test

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Author Info

  • Palaskas, Theodosios B.
  • Varangis, Panos N.

Abstract

It is a common perception that primary commodity prices tend to move together. This perception is especially common among commodity traders who may justify an increase in the price of one commodity because the prices of other commodities have increased. This commodity price co-movement can be identified among commodities that seem unrelated in terms of production or consumption substitutability or complementarity. But there is no reason for believing that prices of unrelated commodities should move together, except for macroeconomic shocks affecting commodity markets in general. For example, in a recession commodity prices decline across the board because demand declines; and in periods of generalinflation commodity prices rise, partly because commodities provide a hedge against inflation. However, after accounting for macroeconomic shocks, is co-movement among prices still evident? In this paper, the authors test for co-movement and excess co-movement of primary commodity prices using the econometric tests of co-integration in time series and the resulting error-correction models (ECM). The ECMs will be used to examine the existence of short-run excess co-movement between commodity prices, taking into consideration the long-run relationship between them.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 758.

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Date of creation: 31 Aug 1991
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Handle: RePEc:wbk:wbrwps:758

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Keywords: Crops&Crop Management Systems; Environmental Economics&Policies; Montreal Protocol; Markets and Market Access; Access to Markets;

References

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  1. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1333-54, November.
  2. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  3. 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.
  4. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  5. Ghura, Dhaneshwar, 1990. "How commodity prices respond to macroeconomic news," Policy Research Working Paper Series 354, The World Bank.
  6. Palaskas, Theodosios & Varangis, Panos, 1989. "Primary commodity prices and macroeconomic variables : a long run relationship," Policy Research Working Paper Series 314, The World Bank.
  7. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 153-74, January.
  8. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 33(3), pages 311-340, December.
  9. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1035-56, September.
  10. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  11. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(4), pages 425-38, November.
  12. Kunst, Robert & Neusser, Klaus, 1990. "Cointegration in a Macroeconomic System," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 351-65, Oct.-Dec..
  13. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(352), pages 661-92, December.
  14. Alogoskoufis, George & Martin, Christopher & Pittis, Nikitas, 1990. "Pricing and Product Market Structure in Open Economies: An Empirical Test," CEPR Discussion Papers, C.E.P.R. Discussion Papers 486, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Sévi, Benoît & Le Pen, Yannick, 2013. "Futures trading and the excess comovement of commodity prices," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/11382, Paris Dauphine University.
  2. Bhar, Ramaprasad & Hammoudeh, Shawkat, 2011. "Commodities and financial variables: Analyzing relationships in a changing regime environment," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(4), pages 469-484, October.
  3. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
  4. Baffes, John & Gohou, Gaston, 2005. "The co-movement between cotton and polyester prices," Policy Research Working Paper Series 3534, The World Bank.
  5. Sari, Ramazan & Hammoudeh, Shawkat & Soytas, Ugur, 2010. "Dynamics of oil price, precious metal prices, and exchange rate," Energy Economics, Elsevier, Elsevier, vol. 32(2), pages 351-362, March.
  6. repec:ipg:wpaper:19 is not listed on IDEAS
  7. Natanelov, Valeri & Alam, Mohammad Jahangir & McKenzie, Andrew M. & Van Huylenbroeck, Guido, 2011. "Is There Co-Movement of Agricultural Commodities Futures Prices and Crude Oil?," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland, European Association of Agricultural Economists 114626, European Association of Agricultural Economists.
  8. Natanelov, Valeri & Alam, Mohammad J. & McKenzie, Andrew M. & Van Huylenbroeck, Guido, 2011. "Is there co-movement of agricultural commodities futures prices and crude oil?," Energy Policy, Elsevier, Elsevier, vol. 39(9), pages 4971-4984, September.
  9. Jain, Anshul & Ghosh, Sajal, 2013. "Dynamics of global oil prices, exchange rate and precious metal prices in India," Resources Policy, Elsevier, Elsevier, vol. 38(1), pages 88-93.
  10. Firew B Woldeyes, 2013. "Long-run Effects of Resource Rents in Developing Countries: The role of public investment management," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 105, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  11. Soytas, Ugur & Sari, Ramazan & Hammoudeh, Shawkat & Hacihasanoglu, Erk, 2009. "World oil prices, precious metal prices and macroeconomy in Turkey," Energy Policy, Elsevier, Elsevier, vol. 37(12), pages 5557-5566, December.
  12. C. John McDermott & Alasdair Scott & Paul Cashin, 1999. "The Myth of Comoving Commodity Prices," IMF Working Papers, International Monetary Fund 99/169, International Monetary Fund.
  13. Labys, W. C. & Achouch, A. & Terraza, M., 1999. "Metal prices and the business cycle," Resources Policy, Elsevier, Elsevier, vol. 25(4), pages 229-238, December.
  14. Le Pen, Yannick & Sévi, Benoît, 2010. "Revisiting the excess co-movements of commodity prices in a data-rich environment," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/6800, Paris Dauphine University.
  15. Walter C. Labys, 2003. "New Directions in the Modeling and Forecasting of Commodity Markets," Mondes en développement, De Boeck Université, De Boeck Université, vol. 122(2), pages 3-19.

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