Modern Economy, 2011, 2, 335-339
doi:10.4236/me.2011.23036 Published Online July 2011 (http://www.SciRP.org/journal/me)
Co-Movement between Commodity Market and Equity
Market: Does Commodity Mark et C ha ng e?
Nobuyoshi Yamori
Graduat e School of Economics, Nagoya University Furo-Cho Chikusa-Ku, Nagoya, Japan
Received February 20, 2011; revised March 13, 2011; accepted April 24, 2011
Abstract
This paper, using Japanese market data, finds that although the correlation between equity markets and
commodity market used to be negative or almost zero before around 2006, it has increased significantly after
the global financial crisis in the autumn of 2008. In this sense, the commodity market lost its character as an
alternative asset.
Keywords: TOCOM, Commodity Futures, Japan, Index, Bubble
1. Introduction
The crash in equity markets occurred in autumn of 2008,
while commodity markets also recorded an historical
decline. For example, futures prices for West Texas In-
termediate (WTI) on the New York Mercantile Exchange
(NYMEX), which is the global crude oil price index,
dropped by 33% in only a month of October, which
represents more than a 50% drop in four months when
compared with the peak in July.
There has been a distinct expansion in global com-
modity futures transactions in recent years. In particular,
the speed of expansion accelerated from 2006 to 2008.
Transaction activity has resulted in higher commodity
prices in recent years. Figure 1 shows the transition on
the commodity price index published by the Tokyo
Commodity Exchange (TOCOM), which is the most
representative commodity index of Japanese commodity
markets and indicates average price movements in com-
modities such as gold, oil or gasoline which are listed on
TOCOM1.
According to Figure 1, there is a gentle rise after
about 2000 with an acceleration in the price increase
after 2005. Although the price increase continued during
2008, after reaching a maximum in July 2008, there was
a sharp decline. The recent developments in terms of
volume and prices in commodity markets should not be
seen as a simple extension of the traditional movement,
but as the result of a structural change.
This paper is the first paper in the literature to investi-
gate the relationship between commodity market and
equity market by using Japanese daily data during the
global financial crisis period and to find that, unlike pre-
vious period, there was a strong positive correlation be-
tween commodity returns and equity returns during the
crisis.
This paper is organized as follows. Section 2 explains
recent changes regarding participants in commodity
markets. Namely, in addition to traditional participants
such as hedgers, who buy commodities (e.g. corn and oil)
to produce final goods and services, financial investors
including hedge funds, financial institutions and pension
funds have actively traded commodities. In Section 3, we
explain that financial institutions are interested in com-
modity investments, because commodity investments
0
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250
300
350
400
450
19860531 19870430 19880329 19890303 19900307 19910313 19920318 19930322 19940328 19950404 19960408 19970415 19980422 19990430 20000512 20010518 20020524 20030530 20040609 20050620 20060623 20070628 20080704 20090714
1The “Nikkei-TOCOM Commodity Index” which had originally been
p
ublicized as the “TOCOM Index” since July 24, 2006, changed its
name to the current one as of the April 1, 2009 calculation. The index
has been listed on the Tokyo Commodity Exchange since March 2010.Figure 1. The Nikkei-TOCOM index.

N. YAMORI 336
would improve portfolio performance. In Section 3, we
also provide an empirical result showing lower correla-
tion between equity price movements and commodity
price movements, by using Japanese data before the
global financial crisis period. Then, Section 4 provides a
new result on the correlation between them during the
global financial crisis and finds that, unlike previous pe-
riod, there was a strong positive correlation between
them. Finally, Section 5 summarizes the result of this
paper and discusses its policy implications.
2. Global Commodity Markets Assuming the
Character of Financial Market
The expansion of commodity futures transactions was
not only due to the rapid increase in the need to hedge
price changes, but was mainly due to the entry into the
market by institutional investors or financial institutions
which use the commodity market for the purpose of asset
management. Thereby, the outstanding balance of com-
modity-index-linked financial products invested by in-
stitutional investors has recently exceeded $140 billion.
Although the transaction amount related to commodity
derivatives in the over-the-counter market of securities
firms or banks of the leading 11 developed nations dis-
played only a moderate increase from 1998 to 2004, a
rapid increase occurred after 2005 from a level of $1400
trillion (base for notional value) in December 2004 to
$9000 trillion in December 20072.
In this manner, recent years have shown a large
change in the participants in the global commodity fu-
tures markets and, as a result, there has been a significant
change in the character of commodity markets from a
market for goods to a financial market.
3. Attraction of Commodities as an
Investment Vehic le
Commodity futures transactions are often considered to
be a high-risk transaction, because the scheme allows
investors to hold large positions with small own capitals.
Therefore, an investor who takes too much risk without
enough funds may suffer the bitter fate.
However, the attraction for institutional investor is not
the type of wager but the quality of diversification of
investment. In other words, investors have realized that
prices on commodity markets are not linked with prices
on equity markets.
Modern investment theory promotes the view that real
risk is not the fluctuation in individual assets but rather
only that part which cannot be negated by the possession
of other assets. Consider an asset, X, whose price fluc-
tuations are very large. If another asset, Y, provide an
offsetting effect, the actual risk of the asset X is reduced
by holding the asset Y.
Actually, previous studies [1] find that there is a low
correlation between price fluctuations in equities and
commodity futures. Past experience in Europe and the
United States has demonstrated that inclusion of both
asset classes will improve overall portfolio returns.
Here, we can confirm it by using Japanese data.
Namely, we use the Tokyo Commodity Exchange (TO-
COM) as an indicator of the commodity market and
compare it with the Tokyo Stock Exchange Stock Price
Index (TOPIX). The coefficient of correlation for the
period from May 31, 1986, to February 28, 2007, is
–0.051. That is to say, this negative coefficient of corre-
lation means that, when equities fall, on average, com-
modities rise.
The conspicuous feature is that when equities experi-
ence sharp declines, commodities do not decline in a
similar manner. Table 1 shows fluctuation in commodity
prices on the five days with the largest price decline ratio
in approximately 22 years from May 31, 1986 to De-
cember 28, 2007 in Tokyo market.
Although equities fell by 15% on one day on October
20, 1987, commodities registered a 0.6% gain. Of the
worst five days, there was also a commodity decline only
on one day and it can be seen that the commodities mar-
ket was bullish when equity markets were in sharp de-
cline. Although the above findings are obtained from
Japanese data, it has been confirmed that the same ap-
plies also to the United States [2].
The reason for the negative or zero correlation is that
Table 1. The TOCOM Performance on the days with the
worst TOPIX performance.
Index Value Daily Return
TOCOMTOPIX TOCOM TOPIX
19871020 93.32 1793.90 0.00580 –0.15810
19900402 85.64 2069.33 0.00410 –0.07365
20010912 92.00 990.80 0.02811 –0.06574
20000417 72.02 1552.46 –0.01297 –0.06317
19900823 117.93 1829.25 0.04474 –0.05869
20040510 144.43 1085.54 0.01514 –0.05846
20070817 251.00 1480.39 –0.03684 –0.05715
20031023 116.41 1017.03 0.00716 –0.05427
19910819 79.04 1663.94 0.01839 –0.05382
19931129 59.16 1350.48 –0.00539 –0.05339
2Bank for International Settlements (BIS), Regular Derivatives Market
Statistics.

N. YAMORI337
the same news has a large difference in effect on equities
and commodity prices. For example when an event hav-
ing a negative impact on equity markets (e.g., increasing
instability in Middle Eastern political situation) causes an
increase in oil prices.
Thus an appropriate combination of investment in eq-
uities and commodity futures enables cancellation of risk
between each asset and improves portfolio performance.
That is to say, commodities have taken on a role as an
alternative investment having risk characteristics which
are different from traditional financial assets such as eq-
uities or bonds.
4. Increasing Relationship between
Commodity Market and Equity Market
It must be kept in mind that the above analysis is based
on historical data. Specifically, the arguments are based
on data mainly from the period prior to the development
of the commodity market towards a financial market.
Consequently the English magazine The Economist
(March 8, 2007) has suggested that commodity markets
should be included with other financial markets, as
commodity markets may have lost their value in invest-
ment diversification.
In contrast, economists from the Commodity Futures
Trading Commission (CFCT) which is the American
supervisory agency used data from American markets
until May 2008 and concluded that there has been no
recent loss of independence of equity and commodity
markets and the attraction of commodity markets for
asset diversification has not been diminished [3].
The same conclusions have been reached with respect
to an analysis of Japanese commodity futures markets
using data up to December 2007 [4]. That is to say, al-
though the commodity market becomes to assume a
character of a financial market, the attraction for portfo-
lio diversification has not been lost3.
However, after July 2008, and particularly after the
Lehman shock in September of the same year, the mar-
kets have taken on a completely different appearance.
Although it has been previously noted that commodi-
ties were relatively bullish on the Black Monday equity
crash, Table 2 shows that the situation was completely
different for 2008. In Table 2, we examine movements
in commodity markets on days of sharp equity declines
in 2008. We find that commodity prices also declined for
all of ten days which recorded the largest decline of the
TOPIX. For example, on October 16 on which the large
decline occurred, commodity markets also experienced
almost a 6% decline. Commodity markets also experi
Table 2. The TOCOM Performance on the Days with the
Worst TOPIX Performance in 2008.
Index Value Daily Return
TOCOMTOPIX TOCOM TOPIX
20081016 238.44 864.52 –0.058 –0.100
20081008 266.65 899.01 –0.029 –0.084
20081024 198.84 806.11 –0.075 –0.078
20081027 191.84 746.46 –0.036 –0.077
20081010 259.83 840.86 –0.036 –0.074
20081022 222.32 889.23 –0.062 –0.073
20081106 212.75 909.3 –0.024 –0.061
20080122 290.04 1219.95 –0.024 –0.059
20081120 184.74 782.28 –0.038 –0.056
20080916 298.68 1117.57 –0.043 –0.052
enced large declines on the other worst five days in 2008.
Fluctuations in the correlation in return for equities
and commodities are examined by sequential calculation
of the return correlation for the TOPIX and TOCOM
over 250 days. First, we define a daily return as the log
difference of the index from the previous trading day.
For example, TOCOM index was 87.20 on May 31, 1986
(i.e. the earliest available day) and 88.02 on the next
trading day (i.e. June 2, 1986). Therefore, daily com-
modity return for June 2, 1986, is 0.00936 = Log (88.02)
– Log (87.20). Second, we calculate daily commodity
and equity returns for each day during the whole period
from June 2, 1986, to May 31, 2010. Third, we calculate
the correlation between daily commodity returns and
daily equity returns for the 250 trading day period4. The
earliest 250-day period in this paper is from June 2, 1986
to April 30, 1987, and the latest 250-day period in this
paper is from May 22, 2009 to May 31, 2010. For sim-
plicity, we call the 250-day periods by using the end day.
For example, the correlation coefficient for the earliest
period is shown as the value for April 30 1987 and that
for the latest period is for May 31, 2010. Therefore, in
Figure 2, 0.005946 is assigned to April 30 1987, and
0.665646 is to May 31, 2010.
Figure 2 shows the results. The correlation coefficient
remained minus until about June 2006, the correlation
coefficient sharply increased after 2007 and has a most
recent value of more than 0.6. It is clear that the move-
ments in markets during autumn of 2008 indicate a break
with the past. Although it can certainly be suggested that
4We also use different time intervals, such as a 100-day period and a
500-day period to confirm the robustness of our results in the text. All
results are qualitatively the same. So, we do not report other results for
simplicity.
3From May 31, 1986 to September 30, 2009, the daily return on both
exchanges shows a negative but almost zero correlation (i.e. correlation
coefficient = –0.00033).

N. YAMORI 338
‐0.6
‐0.4
‐0.2
0
0.2
0.4
0.6
0.8
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Figure 2. The 250-day correlation coefficient between the
Nikkei-TOCOM Index and the TOPIX.
worsening economic conditions result in a fall in demand
for oil, and therefore in that sense, coordinated move-
ments in oil and equity prices are not surprising. How-
ever, although such a causal matrix should have existed
in the past, such a strong positive correlation that we
observed this time has not been seen in the past.
As suggested in Section 2, participants in commodity
markets have changed dramatically before the global
financial crisis. Financial investors have different incen-
tives from traditional commodity market users. So, it is
ironical that financial investors want to enjoy lower or
negative correlation between equity markets and com-
modity markets but their overwhelming presence in com-
modity markets has changed a character of the commod-
ity markets.
However, it is hard to rationalize why financial inves-
tors could not expect these outcomes. We suggest that
the occurrence of this new phenomenon is connected
with the temporal occurrence of bubbles on commodity
markets. Investors realizing large profits on equity mar-
kets enter into commodity markets and continue to buy
while ignoring commodity fundamentals. When large
losses are incurred in equity investments due to equities
collapses, the investors can no longer bear risk on com-
modity markets, start selling commodities and thereby
cause a fall in prices. This situation realizes the concerns
expressed by the Economist.
The “Energy White Paper for FY 2007” published in
2008 by the Japanese Resources and Energy Agency
discussed the bubble in commodity markets5. That report
divided the current increase in energy prices into a fun-
damentals component which can be explained by de-
mand increases and a premium component which cannot
be explained by demand, and concluded that more than
30 dollars of the 90 dollar/barrel oil price in 2007 re-
sulted from the inflow of investment funds.
Since bubbles likely grow and deflate without refer-
ence to the fundamentals of the commodity market, it
should not be surprising at all to observe movements
completely unrelated to the characteristics of the com-
modity market, if a bubble existed. As indicated by the
“Energy White Paper”, since the size of the commodity
market is less than 1% of the global $100 trillion securi-
ties market, it would not be surprising for a large inflow
of funds from the securities market to overwhelm the
commodity market.
5. Concluding Remarks
In this paper, we investigate the relationship between
commodity market and equity market by using Japanese
daily return data during the global financial crisis period
and find that, unlike previous periods; there was a strong
correlation between them during the crisis.
One of the reasons is recent changes of participants in
commodity markets, or financialization of commodity
markets. The overwhelming presence of financial institu-
tions, pension funds, and hedge funds may deprive
commodity markets of a function as alternative invest-
ment vehicles. This is quite serious for Japanese com-
modity markets, which have suffered from chronic de-
cline in trading volumes in recent years since 20046.
Unlike global financial investors, Japanese financial in-
vestors are not active in trading commodity futures so far.
Therefore, the Japanese government encourages more
financial institutions and various institutional investors to
participate in commodity markets, based on the diversi-
fication benefits that commodity markets traditionally
have. If the strong correlation that we find in this paper
remains between equity markets and commodity markets,
Japanese investors become to lose interests in commod-
ity markets.
However, it is too early to conclude that similar be-
havior by the commodity and securities asset classes
experienced during the autumn of 2008 means that com-
modity markets have lost the advantages for portfolio
diversification.
Firstly, although global equity markets displayed the
same behavior during the current crisis, at the same time,
international asset diversification will remain as a stan-
dard portfolio strategy. This type of one-in-a-hundred-
year crash will necessarily result in changes to the risk-
take capacity of investors at the same time in respective
markets. The observed co-movement may be a temporal
phenomenon.
Secondly, if the existence of a bubble was a consider-
able reason for the connection, there is an expectation for
a recovery of the original independence between com-
modity and equity markets as the bubble disappeared
after the burst in 2008.
6Trading volumes in all Japanese commodity exchanges decreased from
241 trillion yen for 2004 to only 61 trillion yen for 2009, in spite o
f
rapid growth of international commodity markets.

N. YAMORI 339
Thirdly, although it is considered that the financial
market bubble caused the commodity market bubble, the
commodity market is linked with actual goods. Thereby,
unlike financial products, commodity prices basically
should be resistant to divergence from fundamental
prices. On this occasion, since financial institutions un-
accustomed to commodity markets enter en masse, re-
cent market instability might emerge. However, we can
expect that prices in commodity markets will be decided
on fundamentals since commodity markets will have a
robust professional core formed from a variety of large
risk takers including financial institutions, investment
funds and institutional investors, which are learning
commodity markets now. If this were the case, attraction
of commodity markets for asset diversification would not
be lost.
Finally it should be noted that since the character of
commodity markets will increasingly resemble a finan-
cial market at least to some degree, regulation from the
viewpoint of finance will become indispensable. Of
course, it is notable that we have to avoid the situation
that regulations for financial markets are simply applied
and commodity markets become hard to use for tradi-
tional commodity users. Also, we need more cooperation
among regulators. In Japan, financial activities are regu-
lated by the Financial Services Agency and commodity
transactions are regulated by Ministry of Economy,
Trade and Industry regarding industrial commodities
such as gold and oil, and by Ministry of Agriculture,
Forestry and Fisheries of Japan regarding agricultural
commodities such as corns and wheat. A scheme to en-
courage cooperation among these regulators should be
established soon.
6. Acknowledgements
The author appreciates an anonymous referee for
valuable comments. This research receives the Sci-
ence Research Grant-in-Aid (Challenging Explora-
tory Research).
7. Reference
[1] G. Gorton, F. Hayashi and G. Rouwenhorst, “Commodity
Futures: A Japanese Perspective,” Yale ICF Working
Paper No. 05-27, February 27, 2007.
[2] G. Lungarella, “Managed Futures: A Real Alternative,”
Swiss Hedge, Fourth Quarter, 2002.
[3] B. Büyükşahin, M. Haigh and M. Robe, “Commodities
and Equities: A ‘Market of One’?” CFTC WP, June 2008.
[4] N. Yamori, “Characteristics of Japan’s Commodities
Index and Its Correlation with Stock Index,” Journal of
Applied Research in Finance, Vol. 1, 2009, pp. 187-192.
[5] R. S. Eckaus, “The Oil Price really is a Speculative Bub-
ble,” Center for Energy and Environmental Policy Re-
search, MIT, Working Paper 08-007, June 2008.