Understanding the Importance of Commodities : How Price Movements in Commodities Affect Different Sectors

Abstract: Most investors strive to maximise return, with lowest possible risk, by designing portfolios believed to perform well in the future. One way to accomplish this is through diversifying over different sectors, which is done best with a good understanding of different factors’ effect on specific sectors. Commodities are directly or indirectly essential for all sectors in the market, motivating the importance of an understanding of commodity-sector relationships. This thesis aims to explore how the performance of companies in a sector responds to price movements of various commodities connected to that sector. To examine this occurrence, multiple linear regression analysis was used and the research was restricted to five sectors in the US market, namely Consumer discretionary, Health care, Industrials, Telecom and Financials, and eleven commodities. Monthly data for commodities, macrovariables and sectors used in the regressions, were retrieved in the form of indices for the period 1 January 1999 to 1 February 2016. Both regressions investigating correlation between the values of the indices and regressions investigating the correlation between the monthly percentage change of the sectors and commodities were utilised in this matter. The results of the thesis consisted of expected outcomes and unexpected ones, with several commodities effecting different sectors in a remarkable way. The explanatory power was however low for the models investigating the correlation between the change in price, while it was notably high for the regressions investigating correlation between the absolute index values.