Co-movements in commodity prices: Global, sectoral and commodity-specific factors

- We study the co-movement in commodity prices with a dynamic latent factor model.
- We decompose commodity prices into global, sectoral, and idiosyncratic components.
- A common global factor is an important source of volatility for commodity prices.
- The common dynamic properties increase in importance since 2004.

This paper characterizes the co-movements in commodity prices with a dynamic latent factor model that decomposes commodity returns into global, sectoral, and idiosyncratic components. The results indicate that global and sectoral factors are important sources of co-movements in commodity returns. A sub-sample analysis further reveals that the global factor increases significantly in importance since 2004, which indicates an increasing integration among commodity markets.