The correlation length of commodity markets - 1. Empirical evidence

It is a common belief nowadays that the world economy is fairly well "integ rated". Yet, this belief often turns out to be in contradiction with empiri cal evidence. As a matter of fact the way distant markets interact is a que stion that has largely been ignored by economists. In this series of two pa pers we examine the role that space, that is to say geographical distance, plays in the economics of commodity markets. The first of these papers pres ents the empirical evidence while the second develops a theoretical framewo rk. The empirical enquiry discloses several noteworthy features, e.g. (i) w ith respect to spatial interaction there is a sharp contrast between stock markets and commodity markets. While there is almost perfect spatial arbitr age in the first case, this is not true for commodity markets. (ii) In spit e of their chaotic behavior in the course of time commodity prices display well defined spatial patterns, (iii) as in statistical physics and fluid dy namics interactions can be described in terms of correlation length. The co rrelation length of a set of markets is seen to increase along with the num ber of transactions; it also increases when transport costs decline as was the case during the "transportation revolution" of the mid-nineteenth centu ry. Using the notion of correlation length one is able to give a quantitati ve meaning to the otherwise ill-defined concept of market integration.