The Determinants of Extreme Commodity Prices

57 Pages Posted: 3 Oct 2011 Last revised: 31 Oct 2012

Date Written: February 2, 2012

Abstract

Fat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events. Utilizing a wide range of factors from the economics and finance literature and quantile regression techniques, we shed light on this issue. Our models explain more variation in extreme than in median price innovations. Common global financial and demand factors account for a greater proportion of extreme daily spot price variations than do commodity-specific factors such as basis and open interest. Financialization of commodity markets, via significant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-2009 period.

Keywords: commodities price returns, extreme dependence, quantile regressions

JEL Classification: G13, G15, E31

Suggested Citation

Kuralbayeva, Karlygash and Malone, Samuel W., The Determinants of Extreme Commodity Prices (February 2, 2012). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1929043 or http://dx.doi.org/10.2139/ssrn.1929043

Karlygash Kuralbayeva (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, Oxfordshire OX1 3UQ
United Kingdom

Samuel W. Malone

University of the Andes ( email )

Carrera Primera # 18A-12
DC D.C. 110311
Colombia

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