Futures trading and the excess comovement of commodity prices
Sévi, Benoît; Le Pen, Yannick (2013-01), Futures trading and the excess comovement of commodity prices, 30th International French Finance Association Conference, 2013-05, Lyon, France
TypeCommunication / Conférence
Conference title30th International French Finance Association Conference
MetadataShow full item record
Abstract (EN)We empirically reinvestigate the issue of excess comovement of commodity prices initially raised in Pindyck and Rotemberg (1990) and show that excess comovement, when it exists, can be related to hedging and speculative pressure in commodity futures markets. Excess comovement appears when commodity prices remain correlated even after adjusting for the impact of common factors. While Pindyck and Rotemberg and following c ontributions examine this issue using a relevant but arbitrary set of control variables, we use recent developments in large approximate factor models so that a richer information set can be considered and “fundamentals” are likely to be adequately modeled. We consider a set of 8 unrelated commodities along with 187 real and nominal macroeconomic variables from which 9 factors are extracted over the period 1993-2010. Our estimates provide evidence of a time-varying excess comovement which is only occasionally significant, even after controlling for heteroscedasticity. Interestingly, excess comovement is mostly significant in recent years when a large increase in the trading of commodities is observed and also in crisis periods. However, we show that this increase in trading activity alone has no explanatory power for the excess comovement. Conversely, measures of hedging and speculative pressure explain around 60% of the estimated ex cess comovement thereby showing the strong impact not only of the financialization process, but also the impact of behaviour of some categories of traders on the price of commodities and the fact that supply and demand variables are not the sole factors in determining equilibrium prices.
Subjects / KeywordsCommodity excess comovement hypothesis; factors model; heteroscedasticity-corrected correlation; commodity index; futures trading
JELC22 - 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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