The Determinants of Extreme Commodity Prices
Fat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events. Utilizing a wide range of factors from the economiccs and finance literature and quantile regression techniques, we shed light on this issue. Our models explain more variation in extreme than in median price innovations. Common global financial and demand factors account for a greater proportion of extreme aily spot price variations than do commodity-specific factors such as basis and open interest. Financialization of commodity markets, via significant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-09 period.
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- Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013.
"The Fundamentals of Commodity Futures Returns,"
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CeMMAP working papers
CWP19/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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