Return connectedness across commodity futures

We obtain the connectedness measures in commodity futures by applying the Diebold-Yilmaz connectedness index methodology. We use an extensive data set of 126 commodity futures from July 1997 to January 2019. In the full-sample analysis, our findings show that crude oil, heating oil, copper, soybean have the highest to-connectedness; these are the commodities contributing more to the variance of other ones. Also, the contribution of futures at different maturities to the connectedness at the commodity level varies significantly; we find no significant maturity effect for gold and silver. In the dynamic analysis, we see that connectedness reaches its peak during the Great Recession. To further characterize the dynamic-connectedness, we decompose the connectedness index into within and cross-commodity components. Cross commodity connectedness dominates the within commodity connectedness after 2004, the year after which a significant amount of investment started flowing into commodity index trading. Finally, by focusing on the dynamic behavior of commodity connectedness over time, we show that the global business cycle and the U.S. Dollar index explain the substantial share of the variation in the connectedness and demand for commodities Granger-cause the total return connectedness of commodity futures.