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Examining Volatility and Correlation for CME Steel Products
In this report we attempt to identify whether the co-movement of HRC CME and a basket of related steel commodities is strong enough. The motivation for investigating this issues stems from the fact that although commodity prices, and in particular prices for related commodities such as the different steel products, tend to be correlated in the “long-run”, over shorter periods of time this relationship may break down and prices may exhibit greater independence in their behavior.
This is because short-term supply demand factors are more independent across the different commodities, due to regional imbalances between supply and demand, differences in transportation costs, other external factors that are unique for each market etc. Whether this is the case, is important for participants in the market as it implies that hedging policies may be less effective over short periods of time due to the higher basis risk.
In this report, we investigate the correlation between the various steel products and the raw materials used in their production process.
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