Commodity and equity markets: Some stylized facts from a copula approach
In this paper, we propose to identify the dependence structure that exists between returns on equity and commodity futures and its development over the past 20years. The key point is that we do not impose any dependence structure, but let the data select it. To do so, we model the dependence between commodity (metal, agriculture and energy) and stock markets using a flexible approach that allows us to investigate whether the co-movement is: (i) symmetrical and frequent, (ii) (a) symmetrical and mostly present during extreme events and (iii) asymmetrical and mostly present during extreme events. We also allow for this dependence to be time-varying from January 1990 to February 2012. Our analysis uncovers three major stylised facts. First, we find that the dependence between commodity and stock markets is time-varying, symmetrical and occurs most of the time (as opposed to mostly during extreme events). Second, not allowing for time-varying parameters in the dependence distribution generates a bias towards an evidence of tail dependence. Similarly, considering only tail dependence may lead to false evidence of asymmetry. Third, a growing co-movement between industrial metals and equity markets is identified as early as 2003; this co-movement spreads to all commodity classes and becomes unambiguously stronger with the global financial crisis after Fall 2008.
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Volume (Year): 37 (2013)
Issue (Month): 12 ()
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