Commodity Pricing: Evidence from Rational and Behavioral Models
64 Pages Posted: 8 May 2018 Last revised: 1 Aug 2018
Date Written: March 27, 2018
In this paper, we study commodity pricing, commodity price volatility and predictability. Our emphasis is on the econometric identification of market expectations about the convenience yield and of discount rates dynamics. To explain commodity prices and return volatility, we consider both a classical fundamental-based model with a rational representative agent and a behavioral extension with heterogeneous agents, thus formally examining the role of speculators, in particular in relation to the super cycle in commodities and the time period most associated with so-called financialization of commodities. We examine a total of 15 commodities covering agriculture, softs, energy and metals and a sample where possible covers the period from 1959 to 2017. In all cases, especially in the final part of the sample period, we reject the restrictions associated with the rational representative agent model, in contrast to the conclusions reached by Pindyck (1993), also when we allow for time varying risk free rates and time varying risk premiums. To the contrary, the behavioral model with agents with heterogenous investment horizons exhibits a much closer empirical fit.
Keywords: Commodity prices, financialization, speculation
JEL Classification: Q49, G12, G15
Suggested Citation: Suggested Citation