What Drives Commodity Prices?

14 Pages Posted: 15 Apr 2020

See all articles by Hyeongwoo Kim

Hyeongwoo Kim

Auburn University

John D. Jackson

University of Nottingham - School of Law

Pramesti Resiandini

Georgia State University

Date Written: October 2014

Abstract

This article examines common forces that drive the prices of 51 tradable commodities. We demonstrate that highly persistent movements of these prices are mostly due to the first common component, which is closely related to the U.S. nominal exchange rate. In particular, our simple factor‐based model outperforms the random walk model in out‐of‐sample forecast for the U.S. exchange rate. The second common factor and de‐factored idiosyncratic components are consistent with stationarity, implying short‐lived deviations from the equilibrium price dynamics. In concert, these results provide an intriguing resolution to the apparent inconsistency that arises from stable markets with nonstationary prices.

Keywords: Commodity prices, cross-section dependence, out-of-sample forecast, panel analysis of nonstationarity in idiosyncratic and common components, U.S. nominal exchange rate

Suggested Citation

Kim, Hyeongwoo and Jackson, John D. and Resiandini, Pramesti, What Drives Commodity Prices? (October 2014). American Journal of Agricultural Economics, Vol. 96, Issue 5, pp. 1455-1468, 2014, Available at SSRN: https://ssrn.com/abstract=3574165 or http://dx.doi.org/10.1093/ajae/aau014

Hyeongwoo Kim (Contact Author)

Auburn University ( email )

138 Miller
Auburn University
Auburn, AL 36849
United States
+1-334-844-2928 (Phone)

HOME PAGE: http://https://sites.google.com/site/hkimphd/

John D. Jackson

University of Nottingham - School of Law ( email )

Law and Social Science Building
University Park
Nottingham, NG7 1BB
United Kingdom

Pramesti Resiandini

Georgia State University

35 Broad Street
Atlanta, GA 30303-3083
United States

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