| Abstract |
In this paper, we investigate whether and how excess correlations among seemingly unrelated commodity returns have increased recently. To this end, we generalize the model of excess comovement, originated by Pindyck and Rotemberg (1990) and extended by Deb, Trivedi, and Varangis (1996), to develop the STDCC model that can capture long-run
trends and short-run dynamics in excess comovement. Using commodit returns data from 1983 to 2011, we find significant increasing long-run trends in excess comovement have appeared since around 2000 in all pairs of agricultural raw materials, beverages, metals, and oils. We confirm that these increasing trends are robust and are not artifacts of the recent financial crisis or changes in the effects of common macroeconomic factors. Moreover, unlike the results above, we
find no significant increasing trends in excess comovements among off-index commodity returns. Those findings provide additional evidence for the recent debates about the effect of financialization on commodity-return correlations. |