The Economics of Commodity Markets

Part I

Commodity Market Dynamics

A proper understanding of commodity markets should start with analysis of the first kind of information at hand, i.e. the historical evolution of prices and returns on these assets over time. This first section aims at providing the reader with the most important insights to be gained from these data series: what are the main stylized facts one should be aware of when investing money in these assets? Which characteristics do they have when compared to the usual asset classes? How do they interact with each other and, more importantly, with the basic building blocks of a traditional asset allocation? Financial econometrics has now provided us with the necessary tools to answer these questions, and we will apply them in a systematic way to help us build a list of the most interesting features. The attention of academics has been increasingly focused in recent years on the understanding of the potential risks and patterns observed in commodity markets. To address the problem any investor is faced with, this section steps into this recent evolution and will be mainly devoted to measuring regularities in commodity markets by using a large dataset of commodity indices. We will follow a thorough analysis of commodity returns, both from an individual and from a cross-asset perspective. In the meantime, Part I of the book tackles three different types of problem that investors are confronted with.

The primary focus of our investigation in Part I of the ...