The Economics of Commodity Markets

As commodity markets have continued their expansion an extensive
and complex financial industry has developed to service them. This
industry includes hundreds of participating firms, including asset
managers, brokers, consultants, verification agencies and a myriad
of other institutions. Universities and other training institutions
have responded to this rapid expansion of commodity markets as well
as their substantial future growth potential by launching
specialized courses on the subject.

The Economics of Commodity Markets attempts to bridge the
gap between academics and working professionals by way of a
textbook that is both theoretically informative and practical.
Based in part on the authors' teaching experience of
commodity finance at the University Paris Dauphine, the book covers
all important commodity markets topics and includes coverage of
recent topics such as financial applications and intuitive economic
reasoning.

The book is composed of three parts that cover: commodity market
dynamics, commodities and the business cycle, and commodities and
fundamental value. The key original approach to the subject matter
lies in a shift away from the descriptive to the econometric
analysis of commodity markets. Information on market trends of
commodities is presented in the first part, with a strong emphasis
on the quantitative treatment of that information in the remaining
two parts of the book. Readers are provided with a clear and
succinct exposition of up-to-date financial economic and
econometric methods as these apply to commodity markets. In
addition a number of useful empirical applications are introduced
and discussed.

This book is a self-contained offering, discussing all key
methods and insights without descending into superfluous
technicalities. All explanations are structured in an accessible
manner, permitting any reader with a basic understanding of
mathematics and finance to work their way through all parts of the
book without having to resort to external sources.

Auteur

About the authors

DR. JULIEN CHEVALLIER is a Tenured Associate Professor of Economics (Professeur des Universités). He undertakes research and lectures on time-series econometrics applied to financial, commodity and energy markets. Dr. Chevallier has research connections with various universities, including the University Paris Dauphine. He received his Ph.D. in Economics from the University Paris West in 2008, and his M.Sc. in Economics from the London School of Economics in 2005. Dr. Chevallier has previously held visiting research positions at the Grantham Institute for Climate Change of Imperial College London, at the Centre for Economic Performance of the London School of Economics, at Georgetown University, and at the World Bank. Dr. Chevallier is the author of the book Econometric Analysis of Carbon Markets (Springer). He has published articles in leading refereed journals, including Applied Economics, Energy Economics, Resource and Energy Economics and The Energy Journal. Furthermore, Dr. Chevallier currently serves as Associate Editor at Energy Economics, at the International Journal of Global Energy Issues, and at the Journal of Stock & Forex Trading.

DR. FLORIAN IELPO is Investment Manager & Associate Researcher at CES Université Paris 1 Panthéon Sorbonne. He acts as an Investment Manager in the asset management branch of a bank in Switzerland. In the meantime, he is an Associate Researcher at the Centre d'Economie de la Sorbonne in Paris, France. His expertise is built on an on-going combination between professional skills gained from building decision tools and strategic decision making, and active academic research focusing on the application of econometric tools relating economics and finance. Florian completed his Ph.D. in Financial Econometrics from the Sorbonne University in Paris, France while working as an Economist in the banking industry. He then occupied various positions, moving from an Econometrician position to becoming an Active Investment Manager. He teaches selected aspects of applied finance at the Sorbonne and Dauphine Universities and at the Ecole Nationale des Techniques Avancées (ENSTA) in Paris, France. Florian's peer-reviewed scientific publications can be found in various journals such as Quantitative Finance, the Journal of Forecasting, Finance Research Letters or the Journal of Investing.

Résumé

As commodity markets have continued their expansion an extensive and complex financial industry has developed to service them. This industry includes hundreds of participating firms, including asset managers, brokers, consultants, verification agencies and a myriad of other institutions. Universities and other training institutions have responded to this rapid expansion of commodity markets as well as their substantial future growth potential by launching specialized courses on the subject.

The Economics of Commodity Markets attempts to bridge the gap between academics and working professionals by way of a textbook that is both theoretically informative and practical. Based in part on the authors' teaching experience of commodity finance at the University Paris Dauphine, the book covers all important commodity markets topics and includes coverage of recent topics such as financial applications and intuitive economic reasoning.

The book is composed of three parts that cover: commodity market dynamics, commodities and the business cycle, and commodities and fundamental value. The key original approach to the subject matter lies in a shift away from the descriptive to the econometric analysis of commodity markets. Information on market trends of commodities is presented in the first part, with a strong emphasis on the quantitative treatment of that information in the remaining two parts of the book. Readers are provided with a clear and succinct exposition of up-to-date financial economic and econometric methods as these apply to commodity markets. In addition a number of useful empirical applications are introduced and discussed.

This book is a self-contained offering, discussing all key methods and insights without descending into superfluous technicalities. All explanations are structured in an accessible manner, permitting any reader with a basic understanding of mathematics and finance to work their way through all parts of the book without having to resort to external sources.

Contenu

Preface xi

List of Figures xiii

List of Tables xvii

Acronyms xxv

Part I Commodity Market Dynamics 1

1 Individual Dynamics: From Trends to Risks 3

1.1 Backwardation, Contango and Commodity Risk Premium 9

1.2 Understanding Commodities' Momenta 13

1.2.1 Persistence of Shocks in Commodities 18

1.2.2 The Nature of Momentum in Commodity Markets 20

1.2.3 Time Series Momentum and the Number and Nature of Regimes 32

1.3 Volatility to Returns Spillovers and Tail Events in Commodities 43

1.3.1 Spillover Effects in Commodity Markets 43

1.3.2 Twenty Years of Jumps in Commodity Markets 51

References 61

2 Cross-Asset Linkages 69

2.1 Common Risk Factors in Commodities 77

2.1.1 Literature Review 78

2.1.2 PCA and the Estimation of the Number of Common Components 80

2.1.3 Empirical Findings 82

2.2 Volatility Spillovers in Commodity Markets 90

2.2.1 The Volatility Spillover Index 96

2.2.2 Four Empirical Applications 98

References 110

Part II Commodities and the Business Cycle 115

3 The Reaction of Commodity Markets to Economic News 117

3.1 Measuring the Impact of Price Discovery on Asset Prices 117

3.2 Key Insights from the Academic Literature 118

3.3 Database of News 119

3.4 An Example: S&P 500, 10Y and USD 121

3.5 Commodity Indices 122

3.6 Dependence on the Business Cycle: NBE…