Effects of speculation and interest rates in a “carry trade” model of commodity prices

Abstract

The paper presents and estimates a model of the prices of oil and other storable commodities, a model that can be characterized as reflecting the carry trade. It focuses on speculative factors, here defined as the trade-off between interest rates on the one hand and market participants' expectations of future price changes on the other hand. It goes beyond past research by bringing to bear new data sources: survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk. Some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today's commodity prices.

Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?

“…We observe that, especially over the high interest rate volatility periods of 2005 − 2007 and 2007 − 2009, these correlations are always negative. This is consistent with studies such as Akram ( 2009), Arora andTanner (2013) andFrankel (2014), which provide empirical evidence for a negative relationship between oil prices and interest rates. Akram (2009) conducts an empirical analysis based on structural VAR models estimated on quarterly data over the period 1990-2007.…”

US monetary policy and sectoral commodity prices

“…1 The above discussion shows that the U.S. monetary policy is a major driver of global asset prices. Other drivers that influenced commodity prices during this period include economic activity and speculation (Frankel, 2013). Overall, the anecdotal evidence points to the importance of the U.S. monetary policy as a common macroeconomic factor that drives the movement of commodity prices, despite its varying and heterogeneous impacts on the dynamics of those prices.…”

“…The expansions in global liquidity and the falls in interest rates have been dynamic since 2001 and are a result of increased activity in the carry trade that moved liquidity from the United States to emerging markets and expanded investments in several asset classes including stocks, real estate and commodities (Hammoudeh and Yuan, 2008;Batten et al, 2010;Belke et al, 2010b;Brana et al, 2012;Frankel, 2013;Vespignani, 2013, 2015;Belke et al, 2014). The impact on commodity prices has however been heterogeneous.…”

Policy impact on volatility dynamics in commodity futures markets: Evidence from China

“…We employ standard time series analysis in order to predict various normalized volatility measures. We use the same set of macroeconomic variables as in Chen et al (2013), given the well documented close relationship between commodity price movements and macroeconomic variables such as CPI (Cody & Mills, 1991;Stock & Watson, 2003), IP (Awokuse & Yang, 2003), and interest rate (Frankel, 2014;Sargent, 1969). We employ data ranging from January 2006 to August 2015 as the prepolicy sample period and adopt regression specification (5) to predict levels of volatility from September 2015 to May 2017, which constitute the counterfactual forecasted volatilities without the effect of the trading restrictions (i.e., our "control group" counterfactual predictions).…”