What Drives Commodity Prices?

Chen, Shu-Ling and Jackson, John D. and Kim, Hyeongwoo and Resiandini, Pramesti (2012): What Drives Commodity Prices?

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity Prices; US Nominal Exchange Rate; Panel Analysis of Nonstationarity in Idiosyncratic and Common Components; Cross-Section Dependence; Out-of-Sample Forecast
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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