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What Drives Commodity Prices?

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

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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40711.

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Date of creation: Aug 2012
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Handle: RePEc:pra:mprapa:40711

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Keywords: Commodity Prices; US Nominal Exchange Rate; Panel Analysis of Nonstationarity in Idiosyncratic and Common Components; Cross-Section Dependence; Out-of-Sample Forecast;

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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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