The Economics of Commodity Markets

1

Individual Dynamics: From Trends to Risks

Starting with the asset-by-asset investigation of commodity returns, the salient features under our assessment will be first the nature and persistence of returns on commodities, moving next to the analysis of higher order moments – that is volatility, asymmetry and extreme events.

One of the first attempts to try to bring together cross-asset conclusions regarding commodities can be found in Kat and Oomen (2007a). Investigating between 22 and 29 commodities over the period 1965–2005 (when such data is available), they reach the following empirical conclusions:

1. First of all – and consistent with the results of Erb and Campbell (2006) – individual commodities do not provide investors with a risk premium on average. This conclusion has to be differentiated from the basket of commodities case: Gorton and Rouwenhorst (2005a) show how such a risk premium is associated to a basket of equally-weighted commodities by using the Commodity Research Bureau dataset covering the 1959–2005 period and including 36 commodities.

2. The persistence in commodities is found to be important: a positive or a negative shock to commodity prices usually has long-lasting effects, unlike equities and bonds. This is an essential feature for trend-following investment strategies.

3. The volatility of commodities is not found to be excessive when compared to the volatility of equities over the period under consideration.

4. They also find a limited asymmetry of ...