A key determinant of commodity price Co-movement: The role of daily market liquidity

Yongmin Zhang, Shusheng Ding, Eric M. Scheffel

Research output: Journal PublicationArticlepeer-review

11 Citations (Scopus)

Abstract

Daily price co-movement across different commodity classes and its key determinant are investigated in this paper. Using co-integration and Granger causality analysis, we identify a common liquidity factor which drives prices of five commodities (oil, silver, gold, corn, live cattle) to move along a common trend. When the market becomes more (less) liquid, all commodity prices tend to move up (down) in the same direction. As a result, such liquidity-driven price co-movement across different commodity classes is likely to generate aggregate price shocks and amplify inflation volatility. As a practical implication of our findings, policy makers ought to be able to draw valuable lessons from monitoring daily commodity liquidity dynamics as a timely bellwether for incipient inflation and to more effectively control inflation risk.

Original languageEnglish
Pages (from-to)170-180
Number of pages11
JournalEconomic Modelling
Volume81
DOIs
Publication statusPublished - Sep 2019

Keywords

  • Commodity price Co-Movement
  • Granger test
  • Liquidity commonality
  • Monetary policy

ASJC Scopus subject areas

  • Economics and Econometrics

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