Increasing Trends in the Excess Comovement of Commodity Prices

We investigate how the excess comovement of commodity prices, that is, the correlation
in commodity returns after filtering out common fundamental shocks, has changed over
the past three decades by developing the smooth-transition dynamic conditional
correlation model that can capture long-run trends and short-run dynamics of correlation
simultaneously. Using data from 1983 to 2011, we find that significant increasing longrun
trends in excess comovement have appeared since around 2000. We confirm that
these increasing trends are neither an artifact of the financial crisis after the bankruptcy
of Lehman Brothers in September 2008 nor the time-varying sensitivities of commodity
returns to common fundamental shocks. Moreover, we find that no significant increasing
trends exist in the excess comovement among off-index commodities and that the surge
of global demand alone cannot explain the increasing trends. These findings provide
additional evidence for the timing and scope of the recent increasing commodity-return
correlations that suggest the influence of the financialization of commodity markets
starting around 2000.