Are Copper Prices Mean Reverting? A Practitioner's Point of View.

Abstract

It is difficult to decide which model to use to represent the price of copper in the projection of cash flows in capital budgeting analysis. In order to aid this decision, the following paper compares the methodologies most commonly used to detect random walk or mean reversion in a financial series of prices in order to prove whether or not the series is stationary.

The methods for analysing stationarity this research covers are classical Unit Root analysis and Variance Ratios. We also include two other methods, namely simulating the series using the information of the original one both with Geometric Brownian Motion and Mean Reversion and also Mean Reversion with Jumps. First, we compare the correlation of the series with the simulated one and then perform Principal Component Analysis in order to compare the similitude between the original series and the simulated ones.

There are some contradictions between the different methods, but important information is obtained for decision making in regard to the model to use in the projection.

Keywords: Market Efficiency, Commodity Prices Simulation, Copper Prices Simulation, Mean Reversion, Mine Valuation, Unit Root Analysis, Variance Ratio Analysis, Principal Component Analysis

JEL Classification: C150, G140, G150, G170, G310