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Futures Trading and the Excess Co-movement of Commodity Prices

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Date
2018
Dewey
Macroéconomie
Sujet
Commodity excess co-movement hypothesis; Factor model; Heteroscedasticity-corrected; correlation; Commodity index; Futures trading
JEL code
C.C2.C22; C.C3.C32; G.G1.G15; E.E1.E17
Journal issue
Review of Finance
Volume
22
Number
1
Publication date
2018
Article pages
381-418
Publisher
Oxford University Press
DOI
http://dx.doi.org/10.1093/rof/rfx039
URI
https://basepub.dauphine.fr/handle/123456789/17555
Collections
  • LEDa : Publications
Metadata
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Author
Le Pen, Yannick
255365 Laboratoire d'Economie de Dauphine [LEDa]
Sévi, Benoît
199934 Groupement de Recherche en Économie Quantitative d'Aix-Marseille [GREQAM]
Type
Article accepté pour publication ou publié
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.

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