Commodity Pricing: Evidence from Rational and Behavioral Models

64 Pages Posted: 8 May 2018 Last revised: 1 Aug 2018

See all articles by Don Bredin

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Valerio Potì

University College Dublin

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting

Date Written: March 27, 2018

Abstract

In this paper, we study commodity pricing, commodity price volatility and predictability. Our emphasis is on the econometric identification of market expectations about the convenience yield and of discount rates dynamics. To explain commodity prices and return volatility, we consider both a classical fundamental-based model with a rational representative agent and a behavioral extension with heterogeneous agents, thus formally examining the role of speculators, in particular in relation to the super cycle in commodities and the time period most associated with so-called financialization of commodities. We examine a total of 15 commodities covering agriculture, softs, energy and metals and a sample where possible covers the period from 1959 to 2017. In all cases, especially in the final part of the sample period, we reject the restrictions associated with the rational representative agent model, in contrast to the conclusions reached by Pindyck (1993), also when we allow for time varying risk free rates and time varying risk premiums. To the contrary, the behavioral model with agents with heterogenous investment horizons exhibits a much closer empirical fit.

Keywords: Commodity prices, financialization, speculation

JEL Classification: Q49, G12, G15

Suggested Citation

Bredin, Don and Potì, Valerio and Salvador, Enrique, Commodity Pricing: Evidence from Rational and Behavioral Models (March 27, 2018). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 18-1. Available at SSRN: https://ssrn.com/abstract=3175275 or http://dx.doi.org/10.2139/ssrn.3175275

Don Bredin (Contact Author)

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Valerio Potì

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

Register to save articles to
your library

Register

Paper statistics

Downloads
240
Abstract Views
1,005
rank
130,465
PlumX Metrics