What Makes Commodity Prices Move Together? An Answer From A Dynamic Factor Model

This paper aims to investigate the common movement of commodity prices. Two alternative hypotheses explaining the origin and nature of this common movement are put forward: the interdependence and the common latent factor hypotheses. This latter is assessed by specifying a DF/FAVAR model whose latent factors move around a zero-mean short-term level and a non-stationary long-run equilibrium level, respectively. Four heterogeneous and mostly unrelated commodities are considered (crude oil, copper, wheat, beef). Using IMF monthly prices over the 1980:1-2016:4 period, a Kalman Filter ML estimation is performed and results suggest that, beside the increasing price volatility, the last decade experienced a significant rise of the long-term equilibrium price. Some implications of this major result are also discussed