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Interest rates, commodity prices, and the cost‐of‐carry model

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  • Jacques A. Schnabel

Abstract

Purpose - The purpose of this paper is to examine the nexus between interest rate changes and commodity spot prices. Design/methodology/approach - The cost‐of‐carry model of simultaneous equilibrium in commodity spot and futures prices is employed to gauge the effects induced by interest rate changes. Results depend crucially on the type of expectations that prevail for the commodity market in question. Findings - Under mean‐reverting expectations, an increase (decrease) in the interest rate will cause the spot price to drop (increase) and commodity suppliers to dishoard (hoard) inventories. Under invariant expectations, the change in the interest rate induces no change in the spot price and no hoarding/dishoarding behavior among commodity suppliers. Under momentum expectations, an increase (decrease) in the interest rate will cause the spot price to increase (drop) and suppliers to hoard (dishoard) inventories. Practical implications - The effects of monetary policy actions on commodity spot prices can be gauged employing the simple model developed here. Originality/value - A novel application of the cost‐of‐carry model is presented.

Suggested Citation

  • Jacques A. Schnabel, 2010. "Interest rates, commodity prices, and the cost‐of‐carry model," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 11(2), pages 221-223, March.
    • Handle: RePEc:eme:jrfpps:15265941011025215
    DOI: 10.1108/15265941011025215
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