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What Drives Commodity Prices?

Author

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

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.

Suggested Citation

  • Shu-Ling Chen & John D. Jackson & Hyeongwoo Kim & Pramesti Resiandini, 2010. "What Drives Commodity Prices?," Auburn Economics Working Paper Series auwp2010-05, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2010-05
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    File URL: https://cla.auburn.edu/econwp/Archives/2010/2010-05.pdf
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    More about this item

    Keywords

    Commodity Prices; US Nominal Exchange Rate; PANIC; Cross-Section Dependence; Out-of-Sample Forecast;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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