The Economics of Commodity Markets

3

The Reaction of Commodity Markets to Economic News

This chapter investigates what kind of economic news impacts commodity prices, depending on the underlying state of the economy (e.g. expansion or recession). We also want to identify whether the amount of news impacting commodity markets has likely increased over the recent period.

The investigation of the reaction of commodity markets to economic news is based on the intuition that liquid financial markets integrate new information efficiently. For example, suppose that the WTI price is strongly based on the level of US GDP growth. If, on the release of the 2008 third quarter growth, the actual published figure is 2% below the market consensus, then the WTI price is very likely to plunge so as to reflect this new information.

3.1 MEASURING THE IMPACT OF PRICE DISCOVERY ON ASSET PRICES

One way to determine what is priced on a given market is to measure the impact of news on asset prices. Note Ri,t the actual value for the release figure i at time t, and Fi,t the market consensus for this figure.1 The ‘surprise’ component in this economic news Si,t is given by:

(3.1)

Given that various items of news may have different scales, it is very common to scale Si,t by its full sample standard deviation. By scaling the surprises by , we ...