A factor model for co-movements of commodity prices

Kenneth West () and Ka-Fu Wong

Journal of International Money and Finance, 2014, vol. 42, issue C, 289-309

Abstract: We fit a factor model to two monthly panels of deflated prices of energy, metals and agricultural commodities. Prices consistently display a tendency to revert towards the factor, though the speed of reversion to the factor is slow. Using both in- and out-of-sample metrics, we compare the factor model to that of a “no change” model and to two simple models that tie changes in commodity prices to percentage change in either global industrial production or the U.S. dollar. The factor model does relatively well at long (12 month) horizons. In terms of commodities, the factor model's performance is best for energy prices, worst for metals, with agricultural prices falling in between.

Keywords: Factor model; Commodity price; Out-of-sample performance; Forecast; Co-movement (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (64)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:42:y:2014:i:c:p:289-309

DOI: 10.1016/j.jimonfin.2013.08.016

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