Influence in commodity markets: Measuring co‐movement globally

• A new measure of price co-movement, known as influence, is applied to commodities.
• A comprehensive sample is analyzed, including energy, non-energy, and agriculture.
• Influence is time-dependent and suggests strong co-movement after the 2000s.
• Macroeconomic determinants of influence and portfolio investment are studied.

This article focuses on a new measure of global co-movement defined as influence: the average partial correlation of one asset with respect to others. The influence of nominal returns and real price cycles of various commodities is computed for the period of January 1968–December 2013. The estimation results show that there is strong co-movement among the average influences of nominal returns of industrial and precious metals since 2003. From an investor׳s perspective, this suggests a reduction in the benefits of portfolio diversification and a convergence towards a single metal class. On the other hand, and as expected, average influence among unrelated commodity returns is generally negligible, except for the period of financial turmoil of 2007–2010. By contrast the influence of real price cycles tends to be highly significant over the whole sample period, even among unrelated commodities. These findings indicate that economic agents׳ perceiving all commodities as a sole asset class is essentially a short-term phenomenon linked to business cycles. Two extensions of this framework are discussed: macroeconomic determinants of commodity influence and portfolio investment decisions.