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On the excess co-movement of commodity prices--A note about the role of fundamental factors in short-run dynamics

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  • Lescaroux, François

Abstract

Since the influential paper by Pindyck and Rotemberg (1990) [The excess co-movement of commodity prices. The Economic Journal 100, 1173-1189], there is a common belief that prices of unrelated commodities tend to move together in excess of what can be explained by fundamentals. In this paper, we consider monthly data of 51 commodities from 1980 to 2008 to confirm that raw resources exhibit co-movement at high frequencies. Nonetheless, focusing on oil and six metal prices, we present evidence that the high level of correlation between cycles of commodity prices can be explained to a large extent by common shocks to inventory levels. Once the influences of supply and demand are filtered out, it appears that the links between commodity prices are rather loose.

Suggested Citation

  • Lescaroux, François, 2009. "On the excess co-movement of commodity prices--A note about the role of fundamental factors in short-run dynamics," Energy Policy, Elsevier, vol. 37(10), pages 3906-3913, October.
  • Handle: RePEc:eee:enepol:v:37:y:2009:i:10:p:3906-3913
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    References listed on IDEAS

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    1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    2. Deb, Partha & Trivedi, Pravin K & Varangis, Panayotis, 1996. "The Excess Co-movement of Commodity Prices Reconsidered," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 275-291, May-June.
    3. Palaskas, Theodosios B. & Varangis, Panos N., 1991. "Is there excess co-movement of primary commodity prices? A co-integration test," Policy Research Working Paper Series 758, The World Bank.
    4. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    5. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    6. Paul Cashin & C John McDermott & Alasdair Scott, 1999. "The myth of co-moving commodity prices," Reserve Bank of New Zealand Discussion Paper Series G99/9, Reserve Bank of New Zealand.
    7. Nicholas Kaldor, 1939. "Speculation and Economic Stability," Review of Economic Studies, Oxford University Press, vol. 7(1), pages 1-27.
    8. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
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