An Empirical Study Of Dynamic Correlation Between Oil Price And Commodity Markets

As derivative markets develops, commodity market derivatives like commodity forwards and futures have become major tools for investment, speculation and portfolio diversification. Oil as one of the most invested commodity, has its correlation with others in commodity markets very important significance, under the circumstances that most commodity have direct relationship with social economic development. Recently with the breaking out of financial crisis, capital markets have seen increasing volatility, which in turn raises the need for hedging and diversification. The correlation between assets under the influence of real economy and financial crisis is attracting more and more attention.In this paper we employed a exogenous-variable-included asymmetric dynamic conditional correlation model (namely ADCCE model) to look deep into the dynamic correlation between oil price and commodity markets. We used the data of natural gas, coal, gold, silver, copper, soybeans, maize and wheat, and studied the effects of real economy on correlations. We also examined whether the beginning and ending of financial crisis significantly changed the correlation structure, and we also used the impact surface to intuitively show the reaction of correlation to joint shocks.We found that, real economy has negative impact on the correlation between oil price with gold and silver. When the economy goes well, investors run away from gold/silver market and turn to oil market for higher return, lowering the correlation. When economy goes down, people go to gold/silver market for diversification, thus integrates the markets. The volatility of oil market quickly transfers to gold/silver markets, increasing the correlation. While for other commodities such as natural gas, copper and agricultural commodities, which have lower financial characteristics than gold/silver, the real economy increases the correlation between oil and them. Because of their important roles in industry production and in people’s daily life, when economy goes well, they appreciates together with oil, the correlation increases. However when economy deteriorates, they don’t depreciate as much as oil price does, the correlation decreases.Besides we found that, except for the correlation between oil and natural gas, other correlations all have two break points. The beginning and end of financial crisis significantly changed the correlation. When the crisis happens, the correlation increased dramatically, and when it ends, the correlation went back to its original level. But for the correlation between oil price and natural gas/coal, the correlation decreased.For the asymmetries of correlation reacting to joint information shocks, we found that oil-gold/silver markets react positively, that means when the oil price and gold/silver market go up, the possibility that they keep going up is larger than the possibility that the prices go down. The opposite is true for the oil-copper correlation. While for the correlation between oil and energy market and oil and agricultural markets, the asymmetry doesn’t exist. This indicates that, energy and agricultural markets have a low proportion of investors and speculators.