The Economics of Commodity Markets

4

Economic Regimes and Commodity Markets as an Asset Class

This chapter is devoted to understanding the stylized behavior of commodity prices depending on various phases of worldwide business cycles. First, we detail the main conclusions stemming from the existing academic literature. Second, we present the structure of the Markov regime-switching model. Third, we investigate to which business cycle commodity markets seem most related. Fourth, we determine during which phase the commodity prices are more likely to rise or fall. Fifth, we develop a performance analysis from a portfolio management optimization viewpoint.

4.1 INDEX PERFORMANCES, THE FED AND THE NBER CRISES

Based on economic conditions, this section is devoted to understanding the stylized behavior of commodity prices depending on each phase of the world business cycle. For example, when considering the price of gold, can we relate inflationary periods to periods of rising gold prices?

There are numerous contributions in the academic literature regarding the dependence of commodity prices on business cycle conditions or the Fed monetary policy. Bjornson and Carter (1997) show that, when interest rates, inflation and economic growth are high, the returns on commodities are usually at low levels. Other empirical studies such as Lummer and Siegel (1993), Kaplan and Lummer (1998), Greer (2000), Jensen et al. (2000; 2002), Gorton and Rouwenhorst (2005), Erb and Campbell (2006) and Roache (2008) discuss the interest in ...