The Economics of Commodity Markets

About the authors

As commodity markets have continued their expansion an extensive and complex financial industry has developed to service them. This industry includes hundreds of participating firms, including asset managers, brokers, consultants, verification agencies and a myriad of other institutions. Universities and other training institutions have responded to this rapid expansion of commodity markets as well as their substantial future growth potential by launching specialized courses on the subject.The Economics of Commodity Markets attempts to bridge the gap between academics and working professionals by way of a textbook that is both theoretically informative and practical. Based in part on the authors' teaching experience of commodity finance at the University Paris Dauphine, the book covers all important commodity markets topics and includes coverage of recent topics such as financial applications and intuitive economic reasoning.The book is composed of three parts that cover: commodity market dynamics, commodities and the business cycle, and commodities and fundamental value. The key original approach to the subject matter lies in a shift away from the descriptive to the econometric analysis of commodity markets. Information on market trends of commodities is presented in the first part, with a strong emphasis on the quantitative treatment of that information in the remaining two parts of the book. Readers are provided with a clear and succinct exposition of up-to-date financial economic and econometric methods as these apply to commodity markets. In addition a number of useful empirical applications are introduced and discussed.This book is a self-contained offering, discussing all key methods and insights without descending into superfluous technicalities. All explanations are structured in an accessible manner, permitting any reader with a basic understanding of mathematics and finance to work their way through all parts of the book without having to resort to external sources.

Preface xiList of Figures xiiiList of Tables xviiAcronyms xxvPART I COMMODITY MARKET DYNAMICS 11 Individual Dynamics: From Trends to Risks 31.1 Backwardation, Contango and Commodity Risk Premium 91.2 Understanding Commodities' Momenta 131.2.1 Persistence of Shocks in Commodities 181.2.2 The Nature of Momentum in Commodity Markets 201.2.3 Time Series Momentum and the Number and Nature of Regimes 321.3 Volatility to Returns Spillovers and Tail Events in Commodities 431.3.1 Spillover Effects in Commodity Markets 431.3.2 Twenty Years of Jumps in Commodity Markets 51References 612 Cross-Asset Linkages 692.1 Common Risk Factors in Commodities 772.1.1 Literature Review 782.1.2 PCA and the Estimation of the Number of Common Components 802.1.3 Empirical Findings 822.2 Volatility Spillovers in Commodity Markets 902.2.1 The Volatility Spillover Index 962.2.2 Four Empirical Applications 98References 110PART II COMMODITIES AND THE BUSINESS CYCLE 1153 The Reaction of Commodity Markets to Economic News 1173.1 Measuring the Impact of Price Discovery on Asset Prices 1173.2 Key Insights from the Academic Literature 1183.3 Database of News 1193.4 An Example: S&P 500, 10Y and USD 1213.5 Commodity Indices 1223.6 Dependence on the Business Cycle: NBER Recessions/Expansion Phases 1233.7 Rolling Analysis 1253.8 Preliminary Findings 1283.9 Market-by-Market Analysis 1293.9.1 Database for Commodity Prices 1293.9.2 Precious Metals 1303.9.3 Industrial Metals 1323.9.4 Energy 1353.9.5 Agricultural Commodities 1383.10 Concluding Remarks 143References 1434 Economic Regimes and Commodity Markets as an Asset Class 1454.1 Index Performances, the Fed and the NBER Crises 1454.2 Measuring the Business Cycle 1474.3 To Which Business Cycle are the Commodity Markets Related? 1484.4 Commodity Performances Depending on the Nature of Each Economic Regime 1554.5 Performance Analysis 1604.6 Concluding Remarks 167References 167PART III COMMODITIES AND FUNDAMENTAL VALUE 1695 Cross-Commodity Linkages 1775.1 A Primer on Granger Causality Testing and Cointegration 1775.1.1 Granger Causality Testing 1775.1.2 Cointegration without Structural Breaks 1775.1.3 Cointegration with Structural Breaks 1795.2 Dataset and Unit Root Test Results 1815.3 Cointegration in Agricultural Markets 1835.3.1 Literature Review 1845.3.2 Results of Granger Causality Tests for Agricultural Products 1885.3.3 Cointegration Analyses for Agricultural Products 1895.3.4 Grains and Soft Commodities 1905.3.5 Agriculture-Energy Linkage 1965.4 Cointegration in Industrial Metals Markets 2025.4.1 Literature Review 2035.4.2 Results of Granger Causality Tests for Industrial Metals 2045.4.3 Cointegration Analyses for Industrial Metals 2045.5 Cointegration in Precious Metals Markets 2085.5.1 Literature Review 2095.5.2 Results of Granger Causality Tests for Precious Metals 2115.5.3 Cointegration Analyses for Precious Metals 2125.6 Cointegration in Energy Markets 2195.6.1 Literature Review 2205.6.2 Results of Granger Causality Tests for Energy Markets 2225.6.3 Cointegration Analyses for Energy Markets 2235.6.4 Petroleum Products 2255.6.5 Oil and Gas Prices 2315.7 Concluding Remarks 235References 2366 Cointegration with Traditional Asset Markets 2416.1 Dataset and Unit Root Test Results 2416.2 Cointegration Between the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 2416.2.1 Literature Review 2446.2.2 Results of Granger Causality Tests Between the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 2456.2.3 Cointegration Analyses for the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 2466.3 Cointegration Between the GSCI Sub-Indices and Exchange Rates 2546.3.1 Literature Review 2546.3.2 Results of Granger Causality Tests Between the GSCI Sub-Indices and Exchange Rates 2566.3.3 Cointegration Analyses for the GSCI Sub-Indices and Exchange Rates 2576.4 Concluding Remarks 266References 2667 Cointegration with Industrial Production and Inflation 2697.1 Dataset and Unit Root Test Results 2697.2 Cointegration Between the GSCI Sub-Indices and Industrial Production 2697.2.1 Literature Review 2747.2.2 Results of Granger Causality Tests Between the GSCI Sub-Indices and Industrial Production 2757.2.3 Cointegration Analyses for Industrial Production and Commodity Prices 2767.3 Cointegration Between the GSCI Sub-Indices, Inflation and Monetary Indices 3007.3.1 Literature Review 3007.3.2 Results of Granger Causality Tests Between the GSCI Sub-Indices, Inflation and Monetary Indices 3027.3.3 Cointegration Analyses for Commodities, Inflation and Monetary Indices 3067.4 Concluding Remarks 320References 321Index 323