The Dynamics of Commodity Prices

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

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

Chris Brooks

University of Reading - ICMA Centre

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - Henley Business School - 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 Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Marcel Prokopczuk (Contact Author)

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

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - Henley Business School - ICMA Centre ( email )

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

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