Common Factors of Commodity Prices
37 Pages Posted: 3 Oct 2017
Date Written: September 2017
In this paper we extract latent factors from a large cross-section of commodity prices, including fuel and non-fuel commodities. We decompose each commodity price series into a global (or common) component, block-specific components and a purely idiosyncratic shock. We find that the bulk of the fluctuations in commodity prices is well summarised by a single global factor. This global factor is closely related to fluctuations in global economic activity and its importance in explaining commodity price variations has increased since the 2000s, especially for oil prices.
Keywords: Commodity prices, Dynamic factor models, Forecasting
JEL Classification: C51, C53, Q02
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