Booms and Busts in Commodity Markets: Bubbles or Fundamentals?

Journal of Futures Markets, Forthcoming

38 Pages Posted: 2 Feb 2014 Last revised: 1 Mar 2015

Chris Brooks

University of Reading - ICMA Centre

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Yingying Wu

Xi'an Jiaotong Liverpool University

Date Written: February 4, 2015

Abstract

This paper considers whether there were periodically collapsing rational speculative bubbles in commodity prices over a forty year period from the late 1960s. We apply a switching regression approach to a broad range of commodities using two different measures of fundamental values – estimated from convenience yields and from a set of macroeconomic factors believed to affect commodity demand. We find reliable evidence for bubbles only among crude oil and feeder cattle, showing the popular belief that the extreme price movements observed in commodity markets were caused by pure speculation to be unsustainable.

Keywords: Commodity futures, Speculative bubble, Switching regression, Convenience yield, Macroeconomic factors

JEL Classification: C12, G13, G14, G23, Q14, Q48

Suggested Citation

Brooks, Chris and Prokopczuk, Marcel and Wu, Yingying, Booms and Busts in Commodity Markets: Bubbles or Fundamentals? (February 4, 2015). Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2388936 or http://dx.doi.org/10.2139/ssrn.2388936

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

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

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

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

Yingying Wu (Contact Author)

Xi'an Jiaotong Liverpool University ( email )

111 Ren’ai Road,
Suzhou Lake Higher Education Town,
Suzhou, Jiangsu 215123
China
(+86) (0)512-81884826 (Phone)
(+86) (0)512-88161730 (Fax)

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