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Common risk factors in commodities

Author

Listed:
  • Julien Chevallier

    (IPAG Business School (IPAG Lab))

  • Florian Ielpo

    (LOIM, CERMSEM, U. Paris 1)

  • Ling-Ni Boon

    (Amundi, University Paris Dauphine)

Abstract

This article aims at establishing an understanding of the common risk factors in commodity markets, as well as their interactions with equities, currencies and interest rates. Since commodity markets often exhibit cross-sectional dependency, common risk factors exist and can be identified. By using daily data from 1995 to 2012, the econometric methodology resorts to factor modeling combined with a criterion to determine the number of factors presented in Alessi et al.(2010). The operational significance of the results is to evaluate risk-adjusted performance of portfolios allocated to commodities, and to help building cross-asset strategies. Investors can then pinpoint the correlation between any two-position taken within commodity markets, and attempt to profitably exploit the common sources of risk. In turn, it should provide the researcher with an increased understanding of the risks at work in the commodity world.

Suggested Citation

  • Julien Chevallier & Florian Ielpo & Ling-Ni Boon, 2013. "Common risk factors in commodities," Economics Bulletin, AccessEcon, vol. 33(4), pages 2801-2816.
    • Handle: RePEc:ebl:ecbull:eb-12-00894
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I4-P263.pdf
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    References listed on IDEAS

    as
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    2. Yannick Le Pen & Benoît Sévi, 2013. "Futures trading and the excess comovement of commodity prices," Post-Print hal-01613916, HAL.
    3. Alexei Onatski, 2009. "Testing Hypotheses About the Number of Factors in Large Factor Models," Econometrica, Econometric Society, vol. 77(5), pages 1447-1479, September.
    4. Stoll, Hans R., 1979. "Commodity Futures and Spot Price Determination and Hedging in Capital Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(4), pages 873-894, November.
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    6. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters, in: Asset Prices and Monetary Policy, pages 291-333, National Bureau of Economic Research, Inc.
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    8. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
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    More about this item

    Keywords

    Common Risk Factor; Commodities; Factor Model; Principle Component Analysis;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G0 - Financial Economics - - General

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