Is Beta Dead for Commodities?

Abstract

Analyzing the relationship between stocks and commodities is important for investors using commodities as a part of their asset allocation. The commodity beta measures how much the commodity return will fall/rise (in percent) if the overall stock market falls/rises 1%. This beta can be decomposed into two parts: the correlation between commodity returns and stock returns, and the relative volatility between commodity returns and stock returns. In this article, the authors show that the static long-term correlation and beta between commodities and stocks vary, but are generally low over time. Slightly more than half of the commodity betas and correlations have reverted back to or below the long-term level. For most commodities, the relative volatility to stocks is now at its long-term level. The authors find it hard to give support to the “financialization” of commodities, since the “spike” in correlation seems temporary, plus the fact that futures return distributions are different (and change differently) than stocks. Rather, they believe that the different characteristics (and the changes) are due to commodity-specific demand/supply conditions, storage properties, general risk aversion, and market regimes.