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Commodity returns co-movements: Fundamentals or "style" effect?

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  • Philippe Charlot

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IUML - FR 3473 Institut universitaire Mer et Littoral - ECN - École Centrale de Nantes - UN - Université de Nantes - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - UA - Université d'Angers - UM - Le Mans Université - UBS - Université de Bretagne Sud - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes - IMT Atlantique - IMT Atlantique Bretagne-Pays de la Loire - IMT - Institut Mines-Télécom [Paris])

  • Olivier Darné

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IUML - FR 3473 Institut universitaire Mer et Littoral - ECN - École Centrale de Nantes - UN - Université de Nantes - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - UA - Université d'Angers - UM - Le Mans Université - UBS - Université de Bretagne Sud - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes - IMT Atlantique - IMT Atlantique Bretagne-Pays de la Loire - IMT - Institut Mines-Télécom [Paris])

  • Zakaria Moussa

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IUML - FR 3473 Institut universitaire Mer et Littoral - ECN - École Centrale de Nantes - UN - Université de Nantes - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - UA - Université d'Angers - UM - Le Mans Université - UBS - Université de Bretagne Sud - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes - IMT Atlantique - IMT Atlantique Bretagne-Pays de la Loire - IMT - Institut Mines-Télécom [Paris])

Abstract

This paper investigates dynamic correlations both across commodities and between commodities and traditional assets, such as equities and government bonds, using the Regime Switching Dynamic Correlation (RSDC) model. In particular, this paper assesses the dynamics of 32 daily commodity futures returns, spanning a period from May 28, 2003, to June 04, 2014, in the light of economic and financial events before and after the mid-2007 financial crisis. There are three major findings. First, prior to the financial crisis, we detect stronger correlation among the wide range of commodities used in the analysis, indicating that the financialization process started impacting commodity price movements from mid-2005. Between commodities taken as an asset class and traditional asset classes our results generally show very weak commodity-equity and commodity-bond correlations prior to the Lehman Brother collapse. This can be explained by the "style "effect theory that correlations between different asset classes in a portfolio weaken. Second, during the financial crisis, correlations both across commodities and between commodities and equities increase dramatically, with a regime change which coincides exactly with the demise of Lehman Brothers on September 15, 2008. This suggests that a strong commodity-equity integration was temporarily masked by the "style "effect. However, commodity-bond correlations switch to a strongly negative regime, showing that government bonds were considered as refuge securities. Third and most importantly, the new and original finding here is the temporary nature of the financial crisis effect identified, as correlations both across commodities and between commodities and traditional assets revert to pre-crisis level from April 2013. This highlights the impact of the financial-based factors on commodity price movements.

Suggested Citation

  • Philippe Charlot & Olivier Darné & Zakaria Moussa, 2014. "Commodity returns co-movements: Fundamentals or "style" effect?," Working Papers hal-01093631, HAL.
  • Handle: RePEc:hal:wpaper:hal-01093631
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01093631
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    References listed on IDEAS

    as
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    Cited by:

    1. Markus Haas, 2018. "A note on the absolute moments of the bivariate normal distribution," Economics Bulletin, AccessEcon, vol. 38(1), pages 650-656.
    2. Mohammad Isleimeyyeh & Amine Ben Amar & Stéphane Goutte, 2021. "Commodity markets dynamics: What do crosscommodities over different nearest-to-maturities tell us?," Working Papers halshs-03211699, HAL.
    3. Bonnier, Jean-Baptiste, 2021. "Speculation and informational efficiency in commodity futures markets," Journal of International Money and Finance, Elsevier, vol. 117(C).
    4. de Boyrie Maria E. & Pavlova Ivelina, 2018. "Equities and Commodities Comovements: Evidence from Emerging Markets," Global Economy Journal, De Gruyter, vol. 18(3), pages 1-14, September.
    5. Maghyereh, Aktham & Abdoh, Hussein, 2020. "The tail dependence structure between investor sentiment and commodity markets," Resources Policy, Elsevier, vol. 68(C).
    6. Yang, Baochen & Pu, Yingjian & Su, Yunpeng, 2020. "The financialization of Chinese commodity markets," Finance Research Letters, Elsevier, vol. 34(C).
    7. Liu, Lu & Zhang, Xiang, 2019. "Financialization and commodity excess spillovers," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 195-216.

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    More about this item

    Keywords

    Financialization; Style effect; Commodities; Cross-market linkages; Financial crisis; RSDC model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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