Commodity price excess co-movement from a historical perspective: 1900-2010

Pindyck and Rotemberg (1990)'s excess co-movement hypothesis states that commodity prices move together beyond what fundamentals can explain, reflecting possibly traders' herding or liquidity constraints. We test for price excess co-movement in 12 commodities - 11 non-energy ones and oil - spanning over a hundred years: 1900-2010. To this end, we approximate commodity demand/supply factors by their apparent consumption. We carry out several tests and find some evidence in favor of excess co-movement, but its nature appears to be time-dependent. In particular, we conclude that excess co-movement with oil is generally present, particularly in the industrial metal class. We also explore the interdependence between portfolio investment decisions and excess co-movement for three unrelated assets: cotton, copper, and petroleum. Based on Conditional Value-at-Risk (CVaR) optimization, we found some correlations between the two, when short sales are excluded, during 1971, 1999-2004, and 2008.