Co-movements in commodity markets and implications in diversification benefits

This study examines the co-movement and causality relationship betweenprices of crude oil, precious metals, and agricultural commodities. We use a novelapproach called wavelet coherence analysis, which allows the measurement ofco-movements in the time–frequency space based on the daily prices of commodities.We decompose data from September 1986 to September 2017 into 12 levels and 5subperiods to find more generalized and convincing results. We confirm thatcommodity prices are in-phase and co-move. Particularly, the coherence is thelargest in the long term and rises sharply in the mid-term during the crisis period.The heterogeneous directions of arrows provide strong evidence that the causalityrelationship between commodity prices varies over time for different frequencies. Wefind that the mixed commodities portfolio can provide diversification benefits inthe mid-term horizons. The findings of this study can guide investors who want tobenefit from diversification while investing in commodity markets.