Covariance Patterns of the Commodity and Equity Markets : A Recent Surprise

This paper is set up to dissect the covariance patterns of the returns on the commodity and equity markets. Analyzing monthly return data from 1970:M1 to 2013M7, the results show that returns on the commodity and equity markets co-vary weakly in the opposite direction (r=-0.12) in the 1970s, move together in the same (weakly positive) direction (r=0.18) in the 1980s, then journey in the slightly opposite (r=-0.08) direction again in the 1980s and run together in the weakly positive (r=0.19) direction again in the 2000s. Then here comes a surprise, in the last 3.5 years (from 2010 to 2013M7), there is a significantly positive surge (r=0.793) in the covariance between the returns on the commodity and equity markets. The OLS estimates show that return on the stock market can significantly (r2=0.63) explain the return variability of the commodity market in the 2010s comparing to other periods