The Economics of Commodity Markets
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Reviews / Votes
"Too many textbooks market themselves as being commodityspecific but are often nothing more than glorified maths books witha loose connection to the asset class. Thankfully, this bookavoids that mistake and offers a very broad but rigorous analysisfor investors interested in accessing the different commoditymarkets." --Neil C Schofield, Director, Financial MarketsTraining "This book represents an important contribution to theliterature on commodity markets. One of the innovations inthis work is the use of advanced econometric techniques to shedlight on linkages between different commodity markets and theirdependence on macro-economic variables. Thus, the bookcomplements recent research on the role that commodity inventoriesplay in driving commodity prices. This book will prove valuablereading to students of commodity markets as well as analysts thatforecast commodity markets or construct portfolios involvingcommodities." --Dr Robert Kosowski, Director of the RiskManagement Laboratory & Associate Professor, Imperial CollegeBusiness School "The Economics of Commodity Markets written by JulienChevallier and Florian Ielpo is an exceptionally valuable andup-to-date reference for investment professionals and researchersinterested in commodity markets. The book reviews howeconometric and economic techniques are applied to descriptiveanalysis of different commodity markets and study of interactionsbetween, and co-movements across, different asset classes(including commodities and traditional investment vehicles, such asstocks and bonds). Any trader or investment manager will find PartII of the book, covering the impacts of business cycles andmacro-economic events on commodity prices, very useful informulating and testing different portfolio strategies. The bookfills a gap in the literature and should be mandatoryreading for anybody interested in these dynamic and rapidlyevolving markets." --Vincent Kaminski, Rice University, HoustonMore details
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Content
Preface xi
List of Figures xiii
List of Tables xvii
Acronyms xxv
Part I Commodity Market Dynamics 1
1 Individual Dynamics: From Trends to Risks 3
1.1 Backwardation, Contango and Commodity Risk Premium 9
1.2 Understanding Commodities' Momenta 13
1.2.1 Persistence of Shocks in Commodities 18
1.2.2 The Nature of Momentum in Commodity Markets 20
1.2.3 Time Series Momentum and the Number and Nature of Regimes 32
1.3 Volatility to Returns Spillovers and Tail Events in Commodities 43
1.3.1 Spillover Effects in Commodity Markets 43
1.3.2 Twenty Years of Jumps in Commodity Markets 51
References 61
2 Cross-Asset Linkages 69
2.1 Common Risk Factors in Commodities 77
2.1.1 Literature Review 78
2.1.2 PCA and the Estimation of the Number of Common Components 80
2.1.3 Empirical Findings 82
2.2 Volatility Spillovers in Commodity Markets 90
2.2.1 The Volatility Spillover Index 96
2.2.2 Four Empirical Applications 98
References 110
Part II Commodities and the Business Cycle 115
3 The Reaction of Commodity Markets to Economic News 117
3.1 Measuring the Impact of Price Discovery on Asset Prices 117
3.2 Key Insights from the Academic Literature 118
3.3 Database of News 119
3.4 An Example: S&P 500, 10Y and USD 121
3.5 Commodity Indices 122
3.6 Dependence on the Business Cycle: NBER Recessions/Expansion Phases 123
3.7 Rolling Analysis 125
3.8 Preliminary Findings 128
3.9 Market-by-Market Analysis 129
3.9.1 Database for Commodity Prices 129
3.9.2 Precious Metals 130
3.9.3 Industrial Metals 132
3.9.4 Energy 135
3.9.5 Agricultural Commodities 138
3.10 Concluding Remarks 143
References 143
4 Economic Regimes and Commodity Markets as an Asset Class 145
4.1 Index Performances, the Fed and the NBER Crises 145
4.2 Measuring the Business Cycle 147
4.3 To Which Business Cycle are the Commodity Markets Related? 148
4.4 Commodity Performances Depending on the Nature of Each Economic Regime 155
4.5 Performance Analysis 160
4.6 Concluding Remarks 167
References 167
Part III Commodities and Fundamental Value 169
5 Cross-Commodity Linkages 177
5.1 A Primer on Granger Causality Testing and Cointegration 177
5.1.1 Granger Causality Testing 177
5.1.2 Cointegration without Structural Breaks 177
5.1.3 Cointegration with Structural Breaks 179
5.2 Dataset and Unit Root Test Results 181
5.3 Cointegration in Agricultural Markets 183
5.3.1 Literature Review 184
5.3.2 Results of Granger Causality Tests for Agricultural Products 188
5.3.3 Cointegration Analyses for Agricultural Products 189
5.3.4 Grains and Soft Commodities 190
5.3.5 Agriculture-Energy Linkage 196
5.4 Cointegration in Industrial Metals Markets 202
5.4.1 Literature Review 203
5.4.2 Results of Granger Causality Tests for Industrial Metals 204
5.4.3 Cointegration Analyses for Industrial Metals 204
5.5 Cointegration in Precious Metals Markets 208
5.5.1 Literature Review 209
5.5.2 Results of Granger Causality Tests for Precious Metals 211
5.5.3 Cointegration Analyses for Precious Metals 212
5.6 Cointegration in Energy Markets 219
5.6.1 Literature Review 220
5.6.2 Results of Granger Causality Tests for Energy Markets 222
5.6.3 Cointegration Analyses for Energy Markets 223
5.6.4 Petroleum Products 225
5.6.5 Oil and Gas Prices 231
5.7 Concluding Remarks 235
References 236
6 Cointegration with Traditional Asset Markets 241
6.1 Dataset and Unit Root Test Results 241
6.2 Cointegration Between the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 241
6.2.1 Literature Review 244
6.2.2 Results of Granger Causality Tests Between the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 245
6.2.3 Cointegration Analyses for the GSCI Sub-Indices, S&P 500 and US 10-Year Rate 246
6.3 Cointegration Between the GSCI Sub-Indices and Exchange Rates 254
6.3.1 Literature Review 254
6.3.2 Results of Granger Causality Tests Between the GSCI Sub-Indices and Exchange Rates 256
6.3.3 Cointegration Analyses for the GSCI Sub-Indices and Exchange Rates 257
6.4 Concluding Remarks 266
References 266
7 Cointegration with Industrial Production and Inflation 269
7.1 Dataset and Unit Root Test Results 269
7.2 Cointegration Between the GSCI Sub-Indices and Industrial Production 269
7.2.1 Literature Review 274
7.2.2 Results of Granger Causality Tests Between the GSCI Sub-Indices and Industrial Production 275
7.2.3 Cointegration Analyses for Industrial Production and Commodity Prices 276
7.3 Cointegration Between the GSCI Sub-Indices, Inflation and Monetary Indices 300
7.3.1 Literature Review 300
7.3.2 Results of Granger Causality Tests Between the GSCI Sub-Indices, Inflation and Monetary Indices 302
7.3.3 Cointegration Analyses for Commodities, Inflation and Monetary Indices 306
7.4 Concluding Remarks 320
References 321
Index 323
