A Dynamic Factor Model for Commodity Prices

Doga Bilgin and Reinhard Ellwanger

Staff Analytical Notes from Bank of Canada

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.

Keywords: Econometric and statistical methods; Recent economic and financial developments (search for similar items in EconPapers)
JEL-codes: C51 Q02 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsan:17-12

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