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What Drives Commodity Prices?

Author

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  • Chen, Shu-Ling
  • Jackson, John D.
  • Kim, Hyeongwoo
  • Resiandini, Pramesti

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.

Suggested Citation

  • Chen, Shu-Ling & Jackson, John D. & Kim, Hyeongwoo & Resiandini, Pramesti, 2012. "What Drives Commodity Prices?," MPRA Paper 40711, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40711
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    More about this item

    Keywords

    Commodity Prices; US Nominal Exchange Rate; Panel Analysis of Nonstationarity in Idiosyncratic and Common Components; Cross-Section Dependence; Out-of-Sample Forecast;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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