CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 27

Macroeconomic Determinants of Commodity Futures Returns*

Commodities have enjoyed a renewed interest from both investors and academics in recent years. After the oil price shocks in the 1970s, a period of declining commodity prices followed for the next 20 years, which went along with little attention from the academic side. Currently, prices of many commodities are at a record high in nominal terms and at a high level in real terms.

Most of the literature on commodities concentrates on long-term passive investments in commodity futures. However, a pure buy-and-hold strategy may lead to higher-risk positions and further disadvantages for the investor. On the one hand, investors have no influence on the timing and weights of portfolio constituents, and thus cannot react to market changes. On the other hand, Akey (2005) shows that active management gives the investor the opportunity to minimize risk and take advantage of the market circumstances. In order to be successful, the investor needs a sound understanding of the determinants of commodity prices and the interdependencies between those factors and traditional assets. Commodities are a very heterogeneous asset class, with daily price changes driven mainly by a variety of commodity-specific factors. However, commodity prices are also subject to macroeconomic changes that are common to all commodities.

Pindyck and Rotemberg (1990) find co-movements between largely unrelated commodities that are affected by common macroeconomic ...