Co-movements in commodity markets and implications in diversification benefits

Xiao Jing Cai, Zheng Fang, Youngho Chang, Shuairu Tian, Shigeyuki Hamori

Research output: Contribution to journalArticle

Abstract

This study examines the co-movement and causality relationship between prices of crude oil, precious metals, and agricultural commodities. We use a novel approach called wavelet coherence analysis, which allows the measurement of co-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 5 subperiods to find more generalized and convincing results. We confirm that commodity prices are in-phase and co-move. Particularly, the coherence is the largest 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 causality relationship between commodity prices varies over time for different frequencies. We find that the mixed commodities portfolio can provide diversification benefits in the mid-term horizons. The findings of this study can guide investors who want to benefit from diversification while investing in commodity markets.

Original languageEnglish
JournalEmpirical Economics
DOIs
Publication statusAccepted/In press - Jan 1 2018
Externally publishedYes

Fingerprint

commodity market
Diversification
diversification
commodity
Causality
causality
crude oil
Horizon
Wavelets
Metals
investor
Vary
Decompose
Market
Movement
Comovement
Commodity markets
Commodities
Diversification benefits
Commodity prices

Keywords

  • Agricultural commodities
  • Crude oil
  • Precious metals
  • Sharp ratio
  • Wavelet coherence analysis

ASJC Scopus subject areas

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics

Cite this

Co-movements in commodity markets and implications in diversification benefits. / Cai, Xiao Jing; Fang, Zheng; Chang, Youngho; Tian, Shuairu; Hamori, Shigeyuki.

In: Empirical Economics, 01.01.2018.

Research output: Contribution to journalArticle

Cai, Xiao Jing ; Fang, Zheng ; Chang, Youngho ; Tian, Shuairu ; Hamori, Shigeyuki. / Co-movements in commodity markets and implications in diversification benefits. In: Empirical Economics. 2018.
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