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How important are common factors in driving non-fuel commodity prices? A dynamic factor analysis

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  • Vansteenkiste, Isabel

Abstract

This paper analyses the importance of common factors in shaping non-fuel commodity price movements for the period 1957-2008. For this purpose, a dynamic factor model is estimated using Kalman Filtering techniques. Based on this set-up we are able to separate common and idiosyncratic developments of commodity prices. Our estimation results show that there exists one common significant factor for most non-fuel commodity prices and that this common factor has recently become increasingly important in driving non-fuel commodity prices. However during the seventies and early eighties, the co-movement was much higher. In a next step, we then rely on an instrumental variable approach to uncover which variables could be linked to the common factor. We find that the main statistically significant variables are the oil price, the US dollar effective exchange rate, the real interest rate but more recently also global demand (as measured by a proxy for global industrial production). JEL Classification: E30, F00

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1072.

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Date of creation: Jul 2009
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Handle: RePEc:ecb:ecbwps:20091072

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Keywords: commodity prices; dynamic factor; Kalman filter;

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Cited by:
  1. David M Gomez & Guillermo J Ortega & Benno Torgler & German Debat, 2011. "Co-movements in commodity prices: a note based on network analysis," School of Economics and Finance Discussion Papers and Working Papers Series 274, School of Economics and Finance, Queensland University of Technology.
  2. Karoline Krätschel & Torsten Schmidt, 2012. "Long-run Trends or Short-run Fluctuations – What Establishes the Correlation between Oil and Food Prices?The Interplay of Standardized Tests and Incentives – An Econometric Analysis with Data from," Ruhr Economic Papers 0357, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Yannick Le Pen & Benoît Sévi, 2013. "Futures Trading and the Excess Comovement of Commodity Prices," Working Papers halshs-00793724, HAL.
  4. Lombardi, Marco J. & Osbat, Chiara & Schnatz, Bernd, 2010. "Global commodity cycles and linkages a FAVAR approach," Working Paper Series 1170, European Central Bank.
  5. Joseph W. Gruber & Robert J. Vigfusson, 2012. "Interest rates and the volatility and correlation of commodity prices," International Finance Discussion Papers 1065, Board of Governors of the Federal Reserve System (U.S.).
  6. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2011. "Primary commodity prices : co-movements, common factors and fundamentals," Policy Research Working Paper Series 5578, The World Bank.
  7. Matteo Manera & Marcella Nicolini & Ilaria Vignati, 2012. "Returns in Commodities Futures Markets and Financial Speculation: A Multivariate GARCH Approach," Working Papers 2012.23, Fondazione Eni Enrico Mattei.
  8. Annastiina Silvennoinen & Susan Thorp, 2010. "Financialization, Crisis and Commodity Correlation Dynamics," Research Paper Series 267, Quantitative Finance Research Centre, University of Technology, Sydney.
  9. Phil Briggs & Carly Harker & Tim Ng & Aidan Yao, 2011. "Fluctuations in the international prices of oil, dairy products, beef and lamb between 2000 and 2008: A review of market-specific demand and supply factors," Reserve Bank of New Zealand Discussion Paper Series DP2011/02, Reserve Bank of New Zealand.
  10. Adam Jêdrzejczyk, 2012. "Inflation forecasting using dynamic factor analysis. SAS 4GL programming approach," Working Papers 63, Department of Applied Econometrics, Warsaw School of Economics.
  11. Gal Hochman & Deepak Rajagopal & David Zilberman, 2010. "Are Biofuels the Culprit? OPEC, Food, and Fuel," American Economic Review, American Economic Association, vol. 100(2), pages 183-87, May.
  12. 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.
  13. Krätschell, Karoline & Schmidt, Torsten, 2013. "Long-run trends or short-run fluctuations What establishes the correlation between oil and food prices?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79798, Verein für Socialpolitik / German Economic Association.

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