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The Economics of Commodity Markets

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Table of Contents

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

About the Author

Dr. Julien Chevallier is a Tenured Associate Professor (Professeur des Universites) of Economics at the University Paris 8, where he undertakes research and lectures on time-series econometrics applied to financial, commodity and energy markets, including carbon markets (EU ETS, Kyoto Protocol). He is a member of the Dionysian Economics Lab (Laboratoire d'Economie Dionysien,LED). He is also a member of the Center for Geopolitics and Raw Materials (Centre de Geopolitique de l'Energie et des Matieres Premieres, CGEMP-LEDa) at the University Paris Dauphine, and Visiting Researcher with EconomiX-CNRS at the University Paris West Nanterre La Defense. Prior to this position, Dr. Chevallier was an Assistant Professor of Economics at the University Paris Dauphine [2009-12]. He received his Ph.D. in Economics from the University Paris West Nanterre La Defense in 2008, and his M.Sc. in Economics from the London School of Economics in 2005. Dr. Chevallier has previously held visiting research positions at the Grantham Institute for Climate Change of Imperial College London, at the Centre for Economic Performance of the London School of Economics, at Georgetown University, and at the World Bank. Dr. Chevallier is the author of the book Econometric Analysis of Carbon Markets (Springer). He has published articles in leading refereed journals, including Applied Economics, Energy Economics , Resource and Energy Economics The Energy Journal . Furthermore, Dr. Chevallier currently serves as Associate Editor at Energy Economics, at the International Journal of Global Energy Issues , and at the Journal of Stock & Forex Trading. Additional Memberships of Editorial Boards include Low Carbon Economy , Advances in Energy Research, the Journal of Modern Economy and Management; as well as Guest-Editing special issues at the Journal of Energy Markets Sustainability . Dr. Florian Ielpo is Investment Manager & Associate Researcher at CES -- Universite Paris 1 Pantheon Sorbonne. He acts as an Investment Manager in the asset management branch of a bank in Switzerland. In the meantime, he is an Associate Researcher at the Centre d'Economie de la Sorbonne in Paris, France. His expertise is built on an on-going combination between professional skills gained from building decision tools and strategic decision making, and active academic research focusing on the application of econometric tools relating economics and finance. Florian completed his Ph.D. in Financial Econometrics from the Sorbonne University in Paris, France while working as an Economist in the banking industry. He then occupied various positions, moving from an Econometrician position to becoming an Active Investment Manager. He teaches selected aspects of applied finance at the Sorbonne and Dauphine Universities and at the Ecole Nationale des Techniques Avancees (ENSTA) in Paris, France. Florian's peer-reviewed scientific publications can be found in various journals such as Quantitative Finance , the Journal of Forecasting , Finance Research Letters or the Journal of Investing .

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