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Dynamic convergence of commodity futures: Not all types of commodities are alike

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  • Sensoy, Ahmet
  • Hacihasanoglu, Erk
  • Nguyen, Duc Khuong

Abstract

We analyze the dynamic comovement of commodity futures returns within each category (energy, precious metals, industrial metals, and agriculture) from 1997 to 2013 under the effects of the financialization of commodity markets. Our findings from the dynamic equicorrelation GARCH model of Engle and Kelly (2012) show evidence of convergence for precious and industrial metal commodity futures since mid-2000s. On the other hand, there is no sign of convergence across the agricultural commodity futures, with most of them moving in a unrelated manner. Finally, a relatively high level of convergence is found for energy commodity futures, except for natural gas futures which expectedly behave significantly different from the other energy commodity futures. As a whole, our results suggest some potential for diversification benefits within commodity-specific categories, but at the same time the predominance of physical supply/demand balance as the main driving force of the commodity futures price dynamics rather than global financial conditions.

Suggested Citation

  • Sensoy, Ahmet & Hacihasanoglu, Erk & Nguyen, Duc Khuong, 2015. "Dynamic convergence of commodity futures: Not all types of commodities are alike," Resources Policy, Elsevier, vol. 44(C), pages 150-160.
  • Handle: RePEc:eee:jrpoli:v:44:y:2015:i:c:p:150-160
    DOI: 10.1016/j.resourpol.2015.03.001
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    More about this item

    Keywords

    Commodity futures; Dynamic convergence; Dynamic equicorrelation;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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