Financialization, idiosyncratic information and commodity co-movements

This paper seeks to explore the factors contributing to the return co-movement dynamics in the international commodity markets. We first adopt a minimum spanning tree (MST) characterized by a DCC-GARCH specification to depict the return co-movement among 21 commodities selected from the energy, agricultural and metal commodity markets. A connectedness network is then constructed to examine the contributions of both fundamentals and non-fundamental factors to the level of commodity return co-movement. The empirical results show that linkages across energy commodities are substantially stronger than among agricultural or metal commodities. Non-fundamental factors such as commodity market financialization and market sentiment play important roles in driving return co-movement over the sample period, though their impacts vary over time. (C) 2020 Elsevier B.V. All rights reserved.