Is there excess co-movement of primary commodity prices? A co-integration test

It is a common perception that primary commodity prices tend to move together. This perception is especially common among commodity traders who may justify an increase in the price of one commodity because the prices of other commodities have increased. This commodity price co-movement can be identified among commodities that seem unrelated in terms of production or consumption substitutability or complementarity. But there is no reason for believing that prices of unrelated commodities should move together, except for macroeconomic shocks affecting commodity markets in general. For example, in a recession commodity prices decline across the board because demand declines; and in periods of generalinflation commodity prices rise, partly because commodities provide a hedge against inflation. However, after accounting for macroeconomic shocks, is co-movement among prices still evident? In this paper, the authors test for co-movement and excess co-movement of primary commodity prices using the econometric tests of co-integration in time series and the resulting error-correction models (ECM). The ECMs will be used to examine the existence of short-run excess co-movement between commodity prices, taking into consideration the long-run relationship between them.