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What Drives Commodity Prices?

Shu-Ling Chen, John D. Jackson, Hyeongwoo Kim () and Pramesti Resiandini ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Commodity Prices; US Nominal Exchange Rate; Panel Analysis of Nonstationarity in Idiosyncratic and Common Components; Cross-Section Dependence; Out-of-Sample Forecast (search for similar items in EconPapers)
JEL-codes: C53 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
Date: 2012-08
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Related works:
Journal Article: What Drives Commodity Prices? (2014) Downloads
Working Paper: What Drives Commodity Prices? (2013) Downloads
Working Paper: What Drives Commodity Prices? (2010) Downloads
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