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Commodity Prices: Structural Factors, Financial Markets and Non-Linear Dynamics

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  • Diego Bastourre

    () (Central Bank of Argentina)

  • Jorge Carrera

    () (Central Bank of Argentina)

  • Javier Ibarlucia

    () (Central Bank of Argentina)

Abstract

Up to the financial slump of the second quarter of 2008 commodity prices grew fast for several consecutive years in a highly volatile context. Recent commodity fluctuations have raised both policy concerns and a prolific academic debate. This paper offers a coherent theoretical and empirical framework aimed at improving our knowledge of those elements driving commodity prices in the long run once the so-called process of “financialization of commodities” is incorporated into the analysis. To this end, we employ a smooth transition vector autoregressive model which is suitable for testing the hypothesis derived from a heterogeneous agent model in the commodity markets. The empirical methodology allows us to distinguish among those variables that influence prices in the long run –obtaining in this way an “equilibrium” or “fundamental” price; and the mechanisms that generate, strengthen and eventually correct short run deviations with respect to that equilibrium. The results suggest that high discrepancies between spot and fundamental prices tend to be corrected relatively fast, while small misalignments tend to persist over time without any endogenous correcting force taking place.

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Bibliographic Info

Paper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 201050.

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Length: 59 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bcr:wpaper:201050

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Related research

Keywords: commodity prices; developing countries; financial markets; non-linear dynamics;

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References

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  1. Calista Cheung & Sylvie Morin, 2007. "The Impact of Emerging Asia on Commodity Prices," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 181-224, July-Dece.
  2. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  3. Eduardo Borensztein & Carmen Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Working Papers 94/9, International Monetary Fund.
  4. Maximo Camacho, 2004. "Vector smooth transition regression models for US GDP and the composite index of leading indicators," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(3), pages 173-196.
  5. Fourgeaud Claude & Gourieroux Christian & Pradel J, 1984. "Learning procedure and convergence to rationality," CEPREMAP Working Papers (Couverture Orange) 8411, CEPREMAP.
  6. Westerhoff, Frank & Reitz, Stefan, 2005. "Commodity price dynamics and the nonlinear market impact of technical traders: empirical evidence for the US corn market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 349(3), pages 641-648.
  7. Shin, Yongcheol, 1994. "A Residual-Based Test of the Null of Cointegration Against the Alternative of No Cointegration," Econometric Theory, Cambridge University Press, vol. 10(01), pages 91-115, March.
  8. Chi-Young Choi & Ling Hu & Masao Ogaki, 2005. "Structural Spurious Regressions and A Hausman-type Cointegration Test," RCER Working Papers 517, University of Rochester - Center for Economic Research (RCER).
  9. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  10. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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Cited by:
  1. Diego Bastourre & Jorge Carrera & Javier Ibarlucia & Mariano Sardi, 2012. "Common Drivers in Emerging Market Spreads and Commodity Prices," BCRA Working Paper Series 201257, Central Bank of Argentina, Economic Research Department.

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