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The Dynamics of Commodity PricesChris BrooksUniversity of Reading - ICMA Centre Marcel ProkopczukZeppelin University - Institute of Corporate Management & Economics; University of Reading - Henley Business School - ICMA Centre May 30, 2011 Quantitative Finance, Forthcoming 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. Risk measurement and options pricing and hedging applications exemplify the economic impacts of the differences across commodities and between model specifications.
Number of Pages in PDF File: 45 Keywords: Commodity prices, stochastic volatility, jumps, Markov Chain Monte Carlo JEL Classification: G10, C32 Accepted Paper SeriesDate posted: May 23, 2011 ; Last revised: January 25, 2013Suggested CitationContact Information
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