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What Drives Commodity Prices?

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Author Info

  • Shu-Ling Chen
  • John D. Jackson
  • Hyeongwoo Kim
  • Pramesti Resiandini

Abstract

This paper examines common forces driving the prices of 51 highly tradable commodities. We demonstrate that highly persistent movements of these prices are mostly due to the first common component, which is closely related to the US nominal exchange rate. In particular, our simple factor-based model outperforms the random walk model in out-of-sample forecast for the US exchange rate. The second common factor and de-factored idiosyncratic components are consistent with stationarity, implying short-lived deviations from the equilibrium price dynamics. In concert, these results provide an intriguing resolution to the apparent inconsistency arising from stable markets with nonstationary prices.

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File URL: http://cla.auburn.edu/econwp/Archives/2010/2010-05.pdf
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Bibliographic Info

Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2010-05.

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Date of creation: Oct 2010
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Handle: RePEc:abn:wpaper:auwp2010-05

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Postal: 0326 Haley Center, Auburn University, AL 36849-5049
Phone: (334) 844-4910
Fax: (334) 844-4615
Web page: http://cla.auburn.edu/economics/
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Related research

Keywords: Commodity Prices; US Nominal Exchange Rate; PANIC; Cross-Section Dependence; Out-of-Sample Forecast;

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References

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Cited by:
  1. 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.

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