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A Dynamic Factor Model for Commodity Prices

Author

Listed:
  • Doga Bilgin
  • Reinhard Ellwanger

Abstract

In this note, we present the Commodities Factor Model (CFM), a dynamic factor model for a large cross-section of energy and non-energy commodity prices. The model decomposes price changes in commodities into a common “global” component, a “block” component confined to subgroups of economically related commodities and an idiosyncratic price shock component. Unlike with ordinary factor models, these components have meaningful economic interpretations: the global component mostly relates to global commodity demand shocks, while the idiosyncratic component mostly relates to commodity-specific supply shocks. We give several examples to show that the CFM provides plausible historical decompositions.

Suggested Citation

  • Doga Bilgin & Reinhard Ellwanger, 2017. "A Dynamic Factor Model for Commodity Prices," Staff Analytical Notes 17-12, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-12
    DOI: 10.34989/san-2017-12
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    References listed on IDEAS

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    1. Alejandro Perez-Segura & Robert J. Vigfusson, 2016. "The Relationship Between Oil Prices and Inflation Compensation," IFDP Notes 2016-04-06, Board of Governors of the Federal Reserve System (U.S.).
    2. Simona Delle Chiaie & Laurent Ferrara & Domenico Giannone, 2022. "Common factors of commodity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 461-476, April.
    3. Christiane Baumeister & Lutz Kilian, 2016. "Understanding the Decline in the Price of Oil since June 2014," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(1), pages 131-158.
    4. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
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    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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