Correlations in commodity markets

TL;DR

This paper investigates the evolving correlation structure of commodity futures markets from 1998 to 2007, revealing sector-based clustering and increasing market-wide correlations over time.

Contribution

It introduces a minimal spanning tree approach to analyze commodity dependencies and uncovers nonuniform correlation increases among different contract sectors.

Findings

Market correlations increased over time.

Commodity contracts form sector-based clusters.

Correlation growth varies across different contract branches.

Abstract

In this paper we analyzed dependencies in commodity markets investigating correlations of future contracts for commodities over the period 1998.09.01 - 2007.12.14. We constructed a minimal spanning tree based on the correlation matrix. The tree provides evidence for sector clusterization of investigated contracts. We also studied dynamical properties of commodity dependencies. It turned out that the market was constantly getting more correlated within the investigated period, although the increase of correlation was distributed nonuniformly among all contracts, and depended on contracts branches.