The Dynamics of Commodity Prices

Quantitative Finance, Vol. 13, No. 4, 2013

42 Pages Posted: 23 May 2011 Last revised: 29 Dec 2013

See all articles by Chris Brooks

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: May 30, 2011

Abstract

In this paper we study the stochastic behavior of the prices and volatilities of a sample of six of the most important commodity markets and we compare these properties to those of the equity market. We observe a substantial degree of heterogeneity in the behavior of the series. Our findings show that it is inappropriate to treat different kinds of commodities as a single asset class as is frequently the case in the academic literature and in the industry. We demonstrate that commodities can be a useful diversifier of equity volatility as well as equity returns. Options pricing and hedging applications exemplify the economic impacts of the differences across commodities and between model specifications.

Keywords: Commodity prices, stochastic volatility, jumps, Markov Chain Monte Carlo

JEL Classification: G10, C32

Suggested Citation

Brooks, Chris and Prokopczuk, Marcel, The Dynamics of Commodity Prices (May 30, 2011). Quantitative Finance, Vol. 13, No. 4, 2013, Available at SSRN: https://ssrn.com/abstract=1849505 or http://dx.doi.org/10.2139/ssrn.1849505

Chris Brooks

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
959
Abstract Views
5,000
Rank
44,596
PlumX Metrics