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What Drives Commodity Returns? Market, Sector or Idiosyncratic Factors?
Author(s) -
Ma Jun,
Vivian Andrew,
Wohar Mark E.
Publication year - 2020
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12334
Subject(s) - economics , volatility (finance) , dynamic factor , econometrics , commodity , commodity market , variance (accounting) , factor analysis , point (geometry) , financial economics , mathematics , finance , geometry , accounting
This paper examines the relationship between 43 commodity returns using a dynamic factor model with time varying stochastic volatility. The dynamic factor model decomposes each commodity return into a common (market), sector‐specific and commodity‐specific component. It enables the variance attributed to each component to be estimated at each point in time. We find the return variation explained by the common factor has increased substantially for the recent period and is statistically significant for the vast majority of commodities since 2004 (at each point in time) This phenomenon is the strongest for non‐perishable products. We link the amount of variation explained by the common factor to economic variables.