Quantitative Finance, Vol. 13, No. 4, 2013
42 Pages Posted: 23 May 2011 Last revised: 29 Dec 2013
Date Written: May 30, 2011
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: 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