The Dynamics of Commodity Return Comovements

This paper studies comovements in commodity futures markets. We compare factor models with respect to their fit of commodity return comovements. A model based on traded long-short portfolio returns outperforms a macroeconomic model, and explains 96% of the realised comovement. Dissecting the evidence, we find that comovements are driven by the variation of factor covariances as opposed to sensitivities. Intersectoral correlations are more affected than intrasectoral correlations. Volatility comovements only react following the global financial crisis. Our results cast doubt on the persistence of the effects of financialization and emphasize the importance of the dynamics of factor covariances.