Commodities and Equities: Ever a “Market of One”?

Abstract

Amid the rise in commodity investing that started in 2003, many have asked whether commodities now move more in sync with traditional financial assets. Using daily, weekly and monthly data over 18 years, this article provides evidence largely to the contrary. First, dynamic conditional correlation and recursive co-integration techniques are applied to the prices of, and the returns on, key investable commodity and U.S. equity indices. Compared to the 1991–2002 period, both short- and long-term relationships between passive commodity and equity investments are generally weaker after 2003. Even though the correlations between equity and commodity returns increased sharply in the fall of 2008, during a time of extraordinary economic and financial turbulence, they remained lower than their peaks in the previous decade. Second, the co-movements between equity and commodity returns in periods of extreme returns are analyzed. There is little evidence of a secular increase in spillovers from equity to commodity markets during extreme events. Overall, the results suggest that while commodities provide substantial diversification benefits to passive equity investors, those benefits are weaker precisely when they are needed most.