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UNDERSTANDING WORLD COMMODITY PRICES Returns, Volatility and Diversification

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  • Mei-Hsiu Chen

    (UWA Business School, The University of Western Australia)

Abstract

In recent times, the prices of internationally-traded commodities have reached record highs and there is considerable uncertainty regarding their future. This phenomenon is partially driven by strong demand from a small number of emerging economies, such as China and India. This paper places the recent commodity price boom in historical context, drawing on an investigation of the long-term time-series properties, and presents unique features for 33 individual commodity prices. Using a new methodology for examining cross-sectional variation of commodity returns and its components, we find strong evidence that the prices of world primary commodities are extremely volatile. In addition, prices are roughly 30 percent more volatile under floating than under fixed exchange rate regimes. Finally, using the capital asset pricing model as a loose framework, we find that global macroeconomic risk components have become relatively more important in explaining commodity price volatility.

Suggested Citation

  • Mei-Hsiu Chen, 2009. "UNDERSTANDING WORLD COMMODITY PRICES Returns, Volatility and Diversification," Economics Discussion / Working Papers 09-03, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:09-03
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    References listed on IDEAS

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