Predictability in Commodity Markets: Evidence from More Than a Century
Journal of Commodity Markets (2021) Vol. 24, 100171
51 Pages Posted: 27 Apr 2020 Last revised: 29 Nov 2021
Date Written: April 3, 2020
Using more than 140 years of data, we comprehensively analyze the predictive power of a broad set of business cycle variables for risk and return in commodity spot markets. We find that industrial production growth and inflation are the strongest predictors for future commodity returns. Several further variables help predict future commodity volatilities. The introduction of derivatives generally reduces the predictability in the most active commodity markets but increases the predictability in others. Thus, derivatives likely make markets more efficient, but also attract most of the price discovery activity. Commodity spot volatilities generally rise after futures introduction.
Keywords: Commodities, Return Predictability, Derivatives Introduction, Business Cycle, Volatility Predictability
JEL Classification: G10, G11, G17
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