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Futures Trading and the Excess Comovement of Commodity Prices

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Abstract

We empirically reinvestigate the issue of excess comovement of commodity prices initially raised in Pindyck and Rotemberg (1990) and show that excess comovement, when it exists, can be related to hedging and speculative pressure in commodity futures markets. Excess comovement appears when commodity prices remain correlated even after adjusting for the impact of common factors. While Pindyck and Rotemberg and following contributions examine this issue using a relevant but arbitrary set of control variables, we use recent developments in large approximate factor models so that a richer information set can be considered and “fundamentals” are likely to be adequately modeled. We consider a set of 8 unrelated commodities along with 187 real and nominal macroeconomic variables from which 9 factors are extracted over the period 1993-2010. Our estimates provide evidence of a time-varying excess comovement which is only occasionally significant, even after controlling for heteroscedasticity. Interestingly, excess comovement is mostly significant in recent years when a large increase in the trading of commodities is observed and also in crisis periods. However, we show that this increase in trading activity alone has no explanatory power for the excess comovement. Conversely, measures of hedging and speculative pressure explain around 60% of the estimated excess comovement thereby showing the strong impact not only of the financialization process, but also the impact of behaviour of some categories of traders on the price of commodities and the fact that supply and demand variables are not the sole factors in determining equilibrium prices.

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  • Yannick Le Pen & Benoît Sévi, 2013. "Futures Trading and the Excess Comovement of Commodity Prices," AMSE Working Papers 1301, Aix-Marseille School of Economics, Marseille, France, revised Jan 2013.
  • Handle: RePEc:aim:wpaimx:1301
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    Cited by:

    1. Julien Chevallier & Benoît Sévi, 2013. "A Fear Index to Predict Oil Futures Returns," Working Papers 2013.62, Fondazione Eni Enrico Mattei.
    2. Jan Żelazny, 2016. "Zmiany na rynkach towarowych a regulacje nadzorcze w Unii Europejskiej / Changes on Commodity Markets and Regulation in the European Union," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 15, pages 199-210, September.
    3. Ohashi, Kazuhiko & Okimoto, Tatsuyoshi, 2016. "Increasing trends in the excess comovement of commodity prices," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 48-64.
    4. José Fernández, 2015. "Interdependence among Agricultural Commodity Markets, Macroeconomic Factors, Crude Oil and Commodity Index," Bristol Economics Discussion Papers 15/666, Department of Economics, University of Bristol, UK.
    5. Julien Chevallier & Florian Ielpo & Ling-Ni Boon, 2013. "Common risk factors in commodities," Economics Bulletin, AccessEcon, vol. 33(4), pages 2801-2816.

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    Keywords

    commodity excess comovement hypothesis; factors model; heteroscedasticity-corrected correlation; commodity index; futures trading.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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