Commodity Price Co-movement: Heterogeneity and the Time Varying Impact of Fundamentals

Byrne, Joseph P and Sakemoto, Ryuta and Xu, Bing (2017): Commodity Price Co-movement: Heterogeneity and the Time Varying Impact of Fundamentals.

Abstract

This paper extends the topical literature on the co-movement and determinants of primary commodity prices, by considering heterogeneity in commodities and time variation in the impact of fundamentals. We account for heterogeneity by employing a dynamic hierarchical factor model, which decomposes commodities into global and sectoral factors. Using a time varying parameter factor augmented VAR model, we shock global and sector-specific factors over time. We present plausible impulse responses to demand shocks, real interest rate shocks, and to elevated risks during the global financial crisis. We also identify that materials, food and metals respond heterogeneously to these shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity Prices; Co-movement; Dynamic Hierarchical Factor Models; Time Varying Parameter Factor Augmented VAR.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; G - Financial Economics > G1 - General Financial Markets

References

Abhyankar, A., Xu, B. & Wang, J. (2013). Oil price shocks and the stock market: evidence from Japan. Energy Journal, 34(2), 199-222.

Alam, M.R. & Gilbert, S. (2017). Monetary policy shocks and the dynamics of agricultural commodity prices: evidence from structural and factor-augmented VAR analyses. Agricultural Economics, 48(1), 15-27.

Alvarez-Ramirez, J., Rodriguez, E., Martina, E., & Ibarra-Valdez, C. (2012). Cyclical behavior of crude oil markets and economic recessions in the period 1986–2010. Technological Forecasting and Social Change, 79(1), 47-58.

Alquist, R. & Coibion, O. (2014). Commodity-price comovement and global economic activity. National Bureau of Economic Research Working Paper No. 20003.

Antonakakis, D. & Kizys, R. (2015). Dynamic spillovers between commodity and currency markets. International Review of Financial Analysis, 41, 303-319.

Avalos, F. (2014). Do oil prices drive food prices? The tale of a structural break. Journal of International Money and Finance, 42, 253-271.

Barsky, R., & Kilian, L. (2004). Oil and the macroeconomy since the 1970s. The Journal of Economic Perspectives, 18(4), 115-134.

Baumeister, C. & Kilian, L. (2014). Do oil price increases cause higher food prices? Economic Policy, 29(80), 691-747.

Baumeister, C. & Peersman, G. (2013). Time-varying effects of oil supply shocks on the US economy. American Economic Journal: Macroeconomics, 5(4), 1-28.

Beck, S.E. (1993). A rational expectations model of time varying risk premia in commodities futures markets: Theory and Evidence. International Economic Review, 34(1), 149-68.

Beck, S.E. (2001). Autoregressive conditional heteroscedasticity in commodity spot prices, Journal of Applied Econometrics, 16(2), 115-132.

Bernanke, B.S., Boivin, J. & Eliasz, P. (2005). Measuring monetary policy: A Factor Augmented Vector Autoregressive (FAVAR) approach. Quarterly Journal of Economics, 120, 387-422.

Bloom, N. (2009). The Impact of Uncertainty Shocks. Econometrica, 77(3):623-685.

Bollerslev, T. (1986) Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31(3), 307-327.

Boughton, J. & Branson, W. (1991). Commodity Prices as a Leading Indicator of Inflation, in K. Lahiri & G. Moore (eds.), Leading Economic Indicators Cambridge, UK, Cambridge University Press, 305-338.

Byrne, J.P., Fazio, G. & Fiess, N. (2013). Primary commodity prices: Co-movements, common factors and fundamentals. Journal of Development Economics, 101, 16-26.

Carter, C. A., Rausser, G. C., & Smith, A. (2011). Commodity booms and busts. Annual Review of Resource Economics, 3, 87-118.

Cashin, P., Liang, H. & McDermott, C.J. (2000). How persistent are shocks to world commodity prices? IMF Staff Papers, 47, 177-217.

Cashin, P., McDermott, C.J. & Scott, A. (2002). Booms and slumps in world commodity prices. Journal of Development Economics, 69, 277-296.

Chen, S. L., Jackson, J. D., Kim, H. & Resiandini, P. (2014). What drives commodity prices? American Journal of Agricultural Economics, 96(5), 1455-1468.

Cheng, H., & Xiong, W. (2014). Financialization of Commodity Markets. The Annual Review of Financial Economics, 6, 419-41. 24

Cuddington, J.T. (1992). Long-run trends in 26 primary commodity prices: A disaggregated look at the Prebisch–Singer hypothesis. Journal of Development Economics, 39, 207-227.

Cuddington, J.T. & Jerrett, D. (2008). Super cycles in real metals prices? IMF staff Papers, 55(4), 541-565.

Daskalaki, C., Kostakis, A. & Skiadopoulos, G. (2014). Are there common factors in individual commodity futures returns? Journal of Banking and Finance, 40, 346-363.

Deaton, A. (1999). Commodity prices and growth in Africa. Journal of Economic Perspectives, 13, 23-40

Dixit, A. & Pindyck, R.S. (1994). Investment Under Uncertainty, Princeton University Press, Princeton.

Engle, R. (1982). Autoregressive Conditional Heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987-1007.

Ferraro, D, Rogoff, K. & Rossi, B. (2015). Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates. Journal of International Money and Finance, 54, 116-141.

Frankel, J.A. (2008). The effect of monetary policy on real commodity prices. In Asset Prices and Monetary Policy. Ed. John Y. Campbell, NBER, University of Chicago, Chicago. And NBER Working Paper No. 12713.

Frankel, J.A. (2014). Effects of speculation and interest rates in a “carry trade” model of commodity prices. Journal of International Money and Finance, 42, 88-112.

Ghoshray, A., Kejriwal, M. & Wohar, M. (2014). Breaks, trends and unit roots in commodity prices: a robust investigation. Studies in Nonlinear Dynamics and Econometrics, 18(1), 23-40.

Gruber, J.W. & Vigfusson, R.J. (2012). Interest rates and the volatility and correlation of commodity prices. International Finance Discussion Papers 1065, Board of Governors of the Federal Reserve System.

Harvey, D.I., Kellard, N.M., Madsen, J.B. & Wohar, M.E. (2010). The Prebisch-Singer hypothesis: Four centuries of evidence. Review of Economics and Statistics, 92(2), 367-377.

Issler, V.J., Rodrigues C. & Burjack, R. (2014). Using common features to understand the behavior of metal-commodity prices and forecast them at different horizons. Journal of International Money and Finance, 42, 310-335.

Ivashina, V. & Scharfstein, D. (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), 319-338.

Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99(3), 1053-1069.

Kilian, L. (2013). Structural Vector Autoregressions. In Hashimzade N., & Thornton M., eds, Handbook of Research Methods and Applications in Empirical Macroeconomics. Camberley: Edward Elgar.

Kilian, L. & Park, C. (2009). The impact of oil price shocks on the U.S. stock market. International Economic Review, 50(4), 1267-1287.

Koop, G. & Korobilis, D. (2010). Bayesian multivariate time series methods for empirical macroeconomics. Foundations and Trends in Econometrics, 3, 267-358.

Kose, A., Otrok, C. & Whiteman, C.H. (2003). International business cycles: World, region, and country-specific factors. American Economic Review, 93, 1216- 1239.

Kulatilaka, N. & Perotti, E.C. (1998). Strategic growth options. Management Science, 44(8), 1021-1031.

Mallory, M.L., Irwin, S.H. & Hayes, D.J. (2012). How market efficiency and the theory of storage link corn and ethanol markets. Energy Economics, 34(6), 2157-2166.

Moench, E., Ng, S. & Potter, S. (2013). Dynamic hierarchical factor models. Review of Economics and Statistics, 95(5), 1811-1817.

Nakajima, J., Kasuya, M. & Watanabe, T. (2011). Bayesian analysis of time-varying parameter vector autoregressive model for the Japanese economy and monetary policy. Journal of the Japanese and International Economies, 25(3), 225-245.

Neftci, S.N., & Lu, Y. (2008). Financial instruments to hedge commodity price risk for developing countries. International Monetary Fund Working Paper WP/08/6.

Pindyck, R.S. & Rotemberg, J.J. (1990). The excess co-movement of commodity prices. Economic Journal, 100, 1173– 1187.

Poncela, P., Senra, E. & Sierra, L.P. (2014). Common dynamics of nonenergy commodity prices and their relation to uncertainty. Applied Economics, 46(30), 3724-3735.

Prebisch, R. (1950). The economic development of Latin America and its principal problems. Reprinted in: Economic Bulletin for Latin America, 7, 1962, 1-22.

Primiceri, G.E. (2005). Time Varying Structural Vector Autoregressions and monetary policy. Review of Economic Studies, 72, 821-852.

Ratti, R.A. & Vespignomi, J.L. (2015). Commodity prices and BRIC and G3 liquidity: A SFAVEC approach. Journal of Banking and Finance, 53(C), 18-33.

Roache, S.K. (2012). China's impact on world commodity markets. International Monetary Fund Working Paper WP/12/115.

Singer, H. (1950). The distribution of gains between investing and borrowing countries. American Economic Review 40, 473–485.

Stock, J.H. & Watson, M.W. (2005). Implications of dynamic factor models for VAR analysis. National Bureau of Economic Research Working Paper No. 11467.

Stock, J.H. & Watson, M.W. (2009). Forecasting in dynamic factor models subject to structural instability. The Methodology and Practice of Econometrics. A Festschrift in Honour of David F. Hendry, 173-205.

Svensson, L.E.O. (2008). The effect of monetary policy on real commodity prices: comment. In: Campbell, J.Y. (Ed.), Asset Prices and Monetary Policy. NBER, University of Chicago, Chicago.

Vansteenkiste, I. (2009). How important are common factors in driving non-fuel commodity prices? A dynamic factor analysis. ECB Working Paper 1072, July

West, K.D. & Wong, K.F. (2014). A factor model for co-movements of commodity prices. Journal of International Money and Finance, 42, 289-309.

Wolf, M. (2008). Life in a tough world of high commodity prices. Financial Times Wednesday, March 4, 2008.

Yin, L. & Han, L. (2015). Co-movements in commodity prices: Global, sectoral and commodity-specific factors. Economics Letters, 126, 96-100.