Since the beginning of the year commodity prices (from aluminum, to grains to oil) have significantly increased.
The importance of measuring connectedness
Diebold and al. use nineteen sub-indices of the Bloomberg Commodity Price Index within the Demirer et al. (2016) framework and find:
- System-wide connectedness is 40{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}. That is, on average almost half of a commodity’s future volatility uncertainty is due to “non-own” shocks.
- The energy sector is most important in terms of sending shocks to others
- Natural gas is the energy market with the weakest link to the economic news flow, even when accounting for periods of recession.
Commodity Connectedness
Authors: Francis X. Diebold, Laura Liu, Kamil Yilmaz
From: University of Pennsylvania, Ko¸c University
What drives commodity fluctuations
Delle Chiaie and al. use an approximate dynamic factor model for large cross-sections and a dataset which includes the spot prices of 52 internationally traded commodities and find that:
[…] there is a single global factor driving the bulk of commodity price fluctuations. The global factor is persistent and follows the major expansion and contraction phases in the international business cycle with the largest declines following recession periods. It is also strongly related to measures of economic activity, suggesting a close link with demand factors. This is further corroborated by the fact that the global factor has homogeneous effects on all markets and hence limited effects on relative prices.
Common factors of commodity prices
Authors: Simona Delle Chiaie, Laurent Ferrara, Domenico Giannone
From: ECB
