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Commodity betas with mean reverting output prices

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  • Hong, Gwangheon
  • Sarkar, Sudipto

Abstract

This paper provides a theoretical derivation of commodity beta (stock price sensitivity to commodity price) using a contingent-claim model. The model incorporates operating leverage, financial leverage, costly financial distress, and mean reverting commodity prices; and highlights the important role played by the speed of reversion of the commodity price. It is used to identify theoretically the main determinants of commodity beta. Commodity beta is predicted to be an increasing function of the operating and financial leverage of the firm, and a decreasing function of the company's tax rate and the level, volatility and speed of reversion of the commodity price. Empirical tests with a sample of gold mining firms provide support for these predictions, particularly the new implications of the model (the effect of the commodity price's speed of reversion and the company's tax rate).

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  • Hong, Gwangheon & Sarkar, Sudipto, 2008. "Commodity betas with mean reverting output prices," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1286-1296, July.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:7:p:1286-1296
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    4. Ramos, Sofia B. & Veiga, Helena, 2011. "Risk factors in oil and gas industry returns: International evidence," Energy Economics, Elsevier, vol. 33(3), pages 525-542, May.
    5. Irawan, Denny & Okimoto, Tatsuyoshi, 2022. "Conditional capital surplus and shortfall across renewable and non-renewable resource firms," Energy Economics, Elsevier, vol. 112(C).
    6. Deni Irawan & Tatsuyoshi Okimoto, 2021. "Conditional Capital Surplus and Shortfall across Renewable and Non-Renewable Resource Firms," LPEM FEBUI Working Papers 202165, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2021.
    7. Treanor, Stephen D. & Rogers, Daniel A. & Carter, David A. & Simkins, Betty J., 2014. "Exposure, hedging, and value: New evidence from the U.S. airline industry," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 200-211.
    8. Tri Wahyu Adi, 2022. "The International Gas and Crude Oil Price Variability Effect on Indonesian Coal Mining Companies Listed at IDX," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 1-10, September.
    9. Loïc Maréchal, 2023. "A tale of two premiums revisited," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 580-614, May.
    10. Glover, Kristoffer J. & Hambusch, Gerhard, 2016. "Leveraged investments and agency conflicts when cash flows are mean reverting," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 1-21.

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