Commodities and Equities : Ever a 'Market of One'?

Amid the rise in commodity investing that started in 2003, many have asked whether commodities now move more in sync with traditional financial assets. Using daily, weekly and monthly data from January 1991 through November 2008, we provide evidence largely to the contrary. First, we apply dynamic conditional correlation and recursive cointegration techniques to the prices of, and the returns on, key investable commodity and U.S. equity indices. Compared to the 1991-2002 period, both short- and long-term relationships between passive commodity and equity investments are generally weaker after 2003. Even though the correlations between equity and commodity returns increased sharply in Fall 2008, during extraordinary economic and financial turbulences, they remained lower than their peaks in the previous decade. Second, we analyze the co-movements between equity and commodity returns in periods of extreme returns. We find little evidence of a secular increase in spillovers from equity to commodity markets during extreme events. Overall, our results suggest that commodities provide substantial diversification benefits to passive equity investors, but also that those benefits are weaker precisely when they are most needed