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What Drives Commodity Prices?

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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, 2013. "What Drives Commodity Prices?," Auburn Economics Working Paper Series auwp2013-03, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2013-03
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Byrne, Joseph P & Sakemoto, Ryuta & Xu, Bing, 2017. "Commodity Price Co-movement: Heterogeneity and the Time Varying Impact of Fundamentals," MPRA Paper 80791, University Library of Munich, Germany.
    2. Walter Enders & Matthew T. Holt, 2014. "The Evolving Relationships between Agricultural and Energy Commodity Prices: A Shifting-Mean Vector Autoregressive Analysis," NBER Chapters,in: The Economics of Food Price Volatility, pages 135-187 National Bureau of Economic Research, Inc.
    3. S. Delle Chiaie & L. Ferrara & D. Giannone, 2017. "Common Factors of Commodity Prices," Working papers 645, Banque de France.
    4. repec:eee:eneeco:v:65:y:2017:i:c:p:424-433 is not listed on IDEAS
    5. 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.
    6. Shang, Hua & Yuan, Ping & Huang, Lin, 2016. "Macroeconomic factors and the cross-section of commodity futures returns," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 316-332.
    7. Jebabli, Ikram & Arouri, Mohamed & Teulon, Frédéric, 2014. "On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVP-VAR models with stochastic volatility," Energy Economics, Elsevier, vol. 45(C), pages 66-98.
    8. José Renato Haas Ornelas & Roberto Baltieri Mauad, 2017. "Volatility risk premia and future commodities returns," BIS Working Papers 619, Bank for International Settlements.
    9. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-017-2659-0 is not listed on IDEAS
    10. Pincheira, Pablo & Hardy, Nicolas, 2018. "Forecasting Base Metal Prices with Commodity Currencies," MPRA Paper 83564, University Library of Munich, Germany.
    11. José Renato Haas Ornelas & Roberto Baltieri Mauad, 2017. "Volatility Risk Premia and Future Commodity Returns," Working Papers Series 455, Central Bank of Brazil, Research Department.
    12. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1162-9 is not listed on IDEAS
    13. Anthony N. Rezitis, 2015. "Empirical Analysis of Agricultural Commodity Prices, Crude Oil Prices and US Dollar Exchange Rates using Panel Data Econometric Methods," International Journal of Energy Economics and Policy, Econjournals, vol. 5(3), pages 851-868.

    More about this item

    Keywords

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

    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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