Market Architecture and Exogenous State Transitions: Evidence from Climate Regimes in Commodity Markets

Abstract

Do exogenous climate regimes reorganize the dependence structure of commodity markets, or do they merely shift the general level of co-movement? We introduce the concept of Market Architecture — defined as the persistent topological organization of long-run dependence, invariant to common shifts in the level of correlation — and develop an estimable Block Factor DCC-MIDAS model whose long-run correlation target is analytic and positive definite. Using twenty commodity futures spanning five sectors from November 2, 2000 to June 29, 2026 (T = 6,469), and ENSO states as an exogenous indexing device, we find that El Nino and La Nina operate through two distinct channels. La Nina raises system-wide average long-run correlation by 9.5 percentage points, constituting a system-wide integration shock. After removing this level effect, El Nino is associated with differentiated architecture: Grains and Metals tighten relative to the system mean while Energy and Livestock remain flat, reorganizing the relative structure of dependence across sectors. The evidence supports the theoretical distinction between level and topology proposed in the paper’s foundational propositions. A three-factor specification is selected by BIC (ΔBIC = −833.3) and confirmed by nine independent starts. The results document a predictive association between climate regimes and market architecture, with implications for regime-conditional risk management.

Author abstract from the research manuscript. Typography and line breaks have been normalized; the linked source may show a different manuscript version.