Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-11T05:54:33.294Z Has data issue: false hasContentIssue false
  • English
  • Français

INTEREST RATES AND THE VOLATILITY AND CORRELATION OF COMMODITY PRICES

Published online by Cambridge University Press:  09 November 2016

Joseph W. Gruber  and
Robert J. Vigfusson
Joseph W. Gruber
Affiliation:
Board of Governors of the Federal Reserve System
Robert J. Vigfusson*
Affiliation:
Board of Governors of the Federal Reserve System
*
Address correspondence to: Robert Vigfusson, Board of Governors of the Federal Reserve System, Washington, DC 20551, USA; e-mail: robert.vigfusson@frb.gov.
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we examine the effect of interest rates on the volatility and correlation of commodity prices via a panel GARCH model. In theory, lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, we find that price volatility attributable to transitory shocks declines with interest rates, whereas particularly for metals prices, price correlation increases as interest rates decline.

Keywords

Commodity StoragePanel GARCHDynamic Factor Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 3: Dynamics of Oil and Commodities Prices , April 2018 , pp. 600 - 619
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. We thank Ron Alquist for helpful comments as well as those of an anonymous referee. Nathan Dau-Schmidt and Keith Munz provided superb research assistance.

References

REFERENCES

Akram, Q. Farooq (2009) Commodity prices, interest rates and the dollar. Energy Economics 31, 838–851.CrossRefGoogle Scholar
Arseneau, David M. and Leduc, Sylvain (2012) Commodity Price Movements in a General Equilibrium Model of Storage. International Finance discussion paper 1054, Board of Governors of the Federal Reserve.CrossRefGoogle Scholar
Barsky, Robert and Kilian, Lutz (2002) Do we really know that oil caused the Great Stagflation? A monetary alternative. NBER Macroeconomics Annual 2001 16, 137–197.CrossRefGoogle Scholar
Büyükşahin, Bahattin and Robe, Michel A. (2014) Speculators, commodities and cross-market linkages. Journal of International Money and Finance 42, 38–70.CrossRefGoogle Scholar
Cafiero, Carlo, Bobenrieth, E. S. A., Bobenrieth, J. R. A and Wright, B. D. (2011) The empirical relevance of the competitive storage model. Journal of Econometrics, 62, 44–54.CrossRefGoogle Scholar
Deaton, Angus and Laroque, Guy (1992) On the behavior of commodity prices. Review of Economic Studies 59, 1–23.CrossRefGoogle Scholar
Deaton, Angus and Laroque, Guy (1996) Competitive storage and commodity price dynamics. Journal of Political Economy 104, 896–923.CrossRefGoogle Scholar
Engel, Charles and West, Kenneth D. (2005) Exchange rates and fundamentals. Journal of Political Economy 113, 485–517.CrossRefGoogle Scholar
Engle, Robert (2002) Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics 20, 339–50CrossRefGoogle Scholar
Fattouh, Bassam, Kilian, Lutz, and Mahadeva, Lavan (2012) The Role of Speculation in Oil Markets: What Have we Learned so Far? Working paper, University of Michigan.CrossRefGoogle Scholar
Frankel, Jeffrey (2008) The effect of monetary policy on real commodity prices. In Campbell, John (ed.), Asset Prices and Monetary Policy, pp. 291–327. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Frankel, Jeffrey and Rose, Andrew (2010) Determination of agricultural and mineral commodity prices. In Fry, Renée, Jones, Callum, and Kent, Christopher (eds.), Inflation in an Era of Relative Price Shocks, pp. 9–51. Sydney: Reserve Bank of Australia.Google Scholar
Gruber, Joseph W. and Vigfusson, Robert J. (2012) Interest Rates and the Volatility and Correlation of Commodity Prices. International Finance discussion paper number 1065, Board of Governors of the Federal Reserve.CrossRefGoogle Scholar
Hafner, Christian M. and Herwartz, Helmut (2008) Testing for causality in variance using multivariate GARCH models. Annals of Economics and Statistics 89, 215–241.Google Scholar
Haubrich, Joseph G., Pennacchi, George, and Ritchken, Peter (2011) Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps. Working paper 11-07, Federal Reserve Bank of Cleveland.CrossRefGoogle Scholar
Routledge, Bryan R., Seppi, Duane J., and Spatt, Chester S. (2000) Equilibrium forward curves for commodities. Journal of Finance 55, 1297–1338.CrossRefGoogle Scholar
Schwartz, Eduardo and Smith, James E. (2000) Short-term variations and long-term dynamics in commodity prices. Management Science 46, 893–911.CrossRefGoogle Scholar
Tang, Ke and Xiong, Wei (2012) Index investment and financialization of commodities. Financial Analysts Journal 68, 54–74.CrossRefGoogle Scholar
Unalmis, Deren, Unalmis, Ibrahim, and Unsal, D. Filiz (2012) On the Sources and Consequences of Oil Price Shocks: The Role of Storage. Working paper 12/270, International Monetary Fund.CrossRefGoogle Scholar
Vansteenkiste, Isabel (2009) How Important are Common Factors in Driving Non-Fuel Commodity Prices? A Dynamic Factor Analysis. Working paper 1072, European Central Bank.CrossRefGoogle Scholar