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A factor model for co-movements of commodity prices

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  • West, Kenneth D.
  • Wong, Ka-Fu

Abstract

We fit a factor model to two monthly panels of deflated prices of energy, metals and agricultural commodities. Prices consistently display a tendency to revert towards the factor, though the speed of reversion to the factor is slow. Using both in- and out-of-sample metrics, we compare the factor model to that of a “no change” model and to two simple models that tie changes in commodity prices to percentage change in either global industrial production or the U.S. dollar. The factor model does relatively well at long (12 month) horizons. In terms of commodities, the factor model's performance is best for energy prices, worst for metals, with agricultural prices falling in between.

Suggested Citation

  • West, Kenneth D. & Wong, Ka-Fu, 2014. "A factor model for co-movements of commodity prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 289-309.
    • Handle: RePEc:eee:jimfin:v:42:y:2014:i:c:p:289-309
    DOI: 10.1016/j.jimonfin.2013.08.016
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