Commodity and transportation economic market interactions revisited: New evidence from a dynamic factor model

• Published in: Transportation research. Part E, Logistics and transportation review Vol. 133; p. 101836
• Main Authors: Angelopoulos, Jason, Sahoo, Satya, Visvikis, Ilias D.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.01.2020
• Subjects: Commodity and freight markets; Derivatives markets; Dynamic factor model; Leading indicators; Price discovery; Q02; Leading indicators; C01; G32; Commodity and freight markets; Dynamic factor model; C38; F37; Derivatives markets; Price discovery
• ISSN: 1366-5545; 1878-5794
• DOI: 10.1016/j.tre.2019.101836

•First-time use of dynamic factor model investigating economic spillover effects.•Crude oil prices are the leading economic indicator for commodity and freight rates.•Commodities react faster to new market information and transmit it to freight markets.•Freight rates react differently to corresponding commodity price movements.•Lead-lag economic relationships can enhance trading and risk management strategies. To the best of our knowledge, this is the first paper, to utilise a novel dynamic factor model to investigate the economic relationships between 65 commodity (including oil, energy, metal, ores, and agricultural products), maritime transportation (including tanker and dry bulk freight rates) and financial (including derivatives products) markets, under three different frequencies (daily, weekly and monthly) in a single methodological framework. The paper overcomes a limitation of the previous literature that uses pairwise models, and as such, informational cross-market relationships which may have been ignored or not captured are uncovered for the first time. Results indicate strong economic relationships from commodity to freight markets, with crude oil prices serving as the leading (price discovery) indicator among all the investigated markets, but also between different sub-markets. The results are important to international investors and traders, but also provide essential insights to policymakers and regulators, in terms of commercial strategies, asset positioning, network supply chain modelling, asset investment allocation, budgeting and risk management.