The Dynamics of Commodity Prices
University of Reading - ICMA Centre
Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - Henley Business School - ICMA Centre
May 30, 2011
Quantitative Finance, Vol. 13, No. 4, 2013
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.
Number of Pages in PDF File: 42
Keywords: Commodity prices, stochastic volatility, jumps, Markov Chain Monte Carlo
JEL Classification: G10, C32Accepted Paper Series
Date posted: May 23, 2011 ; Last revised: December 29, 2013
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