Marionettes behind co-movement of commodity prices: Roles of speculative and hedging activities

Do investors' financial trading behaviors really affect commodity price fluctuations? What is their role behind the financialization of commodities? Adopting weekly data from the U.S. Commodity Futures Trading Commission (CFTC), this paper uses quantile regression to study the nonlinear influence of speculative and hedging activities on the co-movement of commodity returns. Empirical results indicate that, firstly, speculative activities enhance the co-movement while hedging activities weaken the correlation between different commodity prices on average. Moreover, both effects are strengthened when the correlation in the quantile regression increases. In addition, the coefficient change trend of sub samples before the crisis at different quantiles is opposite from that of the whole sample and the sample after the crisis, whether it is speculation or hedging. Lastly, speculative and hedging activities have significant asymmetric effects on the excess co-movement. Some new and interesting conclusions are found, with implications for investors, regulators and policymakers.