The Economics of Commodity Markets

2

Cross-Asset Linkages

Beyond these individual analyses, another important aspect is the joint behavior of commodities – if any – and their relationship with other assets. We focus on these issues.

There exists a sparse literature concerning the statistical patterns observed either within commodities or between commodities and standard assets. The main references here are Kat and Oomen (2007b), Gorton and Rouwenhorst (2005) and Erb and Campbell (2006) that have been previously mentioned. Kat and Oomen (2007b) are of particular interest from this cross-asset perspective. They raise four main conclusions – most of them being consistent with the empirical findings in previous studies – that are relevant for the purposes of our chapter:

1. Correlations between groups of commodities are low, whereas correlations between commodities from the same group are larger.

2. Commodities exhibit a low long-term correlation with traditional asset classes. Gorton and Rouwenhorst (2005) have presented similar evidence: they even find negative correlation between equities and some of the commodities in the scope of their investigation.

3. There are limited joint extreme behaviors within commodities, and;

4. Between commodities and traditional asset classes. Extreme or tail events do not occur at the same time within commodity markets or between commodities and the rest of the assets investigated. Benchmarking these conclusions over the 1995–2012 period should help us understand how stable these ...