Thursday, September 20, 2012

The determinants of extreme commodity prices

New OxCARRE paper: Fat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events. Utilizing a wide range of factors from the economics and finance literature and quantile regression techniques, we shed light on this issue. Our models explain more variation in extreme than in median price innovations. Common global nancial and demand factors account for a greater proportion of extreme daily spot price variations than do commodity-speci c factors such as basis and open interest. Financialization of commodity markets, via signifi cant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-2009 period.

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