The Determinants of Dynamic Dependence: An Analysis of Commodity Futures and Equity Markets

This paper investigates the determinants of the dynamic equity-commodity return correlations between five commodity futures sub-sectors (i.e. energy, foods and fibers, grains and oilseeds, livestock, and precious metals) and two equity market indices (i.e. S&P 500 and Russell 3000). We employ the DCC model, as well as three time-varying copulas: (i) the normal copula, (ii) the student’s t copula, and (iii) the rotated-gumbel copula as dependence measures. We then explore the determinants of these various dependence measures by analyzing several macroeconomic, financial, and speculation variables over several sample periods. Our results indicate that the dynamic equity-commodity correlations for the energy, grains and oilseeds, precious metals, and to a lesser extent the foods and fibers, sub-sectors have become increasingly explainable by broad macroeconomic and financial market indicators, particularly after May 2003. Furthermore, these variables exhibit heterogeneous effects in terms of both magnitude and sign on each subsectors’ equity-commodity correlation structure. We also find the effects of increased financial market speculation to be varied among the dynamic correlations of the five sub-sectors.