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Futures Trading and the Excess Co-movement of Commodity Prices

Le Pen, Yannick; Sévi, Benoît (2018), Futures Trading and the Excess Co-movement of Commodity Prices, Review of Finance, 22, 1, p. 381-418. 10.1093/rof/rfx039

Type
Article accepté pour publication ou publié
Date
2018
Journal name
Review of Finance
Volume
22
Number
1
Publisher
Oxford University Press
Pages
381-418
Publication identifier
10.1093/rof/rfx039
Metadata
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Author(s)
Le Pen, Yannick

Sévi, Benoît
Groupement de Recherche en Économie Quantitative d'Aix-Marseille [GREQAM]
Abstract (EN)
We empirically reinvestigate the issue of the excess co-movement of commodity prices initially raised in Pindyck and Rotemberg (1990). Excess co-movement appears when commodity prices remain correlated even after adjusting for the impact of fundamentals. We use recent developments in large approximate factor models to consider a richer information set and adequately model these fundamentals. We consider a set of eight unrelated commodities along with 184 real and nominal macroeconomic variables, from developed and emerging economies, from which nine factors are extracted over the 1993–2013 period. Our estimates provide evidenceof time-varying excess co-movement which is particularly high after 2007. Wefurther show that speculative intensity is a driver of the estimated excess comovement, as speculative trading is both correlated across the commodity futures markets and correlated with the futures prices. Our results can be taken as direct evidence of the significant impact of financialization on commodity-price crossmoments.
Subjects / Keywords
Commodity excess co-movement hypothesis; Factor model; Heteroscedasticity-corrected; correlation; Commodity index; Futures trading
JEL
C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
G15 - International Financial Markets
E17 - Forecasting and Simulation: Models and Applications

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