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- Title
INTEREST RATES AND THE VOLATILITY AND CORRELATION OF COMMODITY PRICES.
- Authors
Gruber, Joseph W.; Vigfusson, Robert J.; Manera, Matteo; Serletis, Apostolos
- Abstract
We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we examine the effect of interest rates on the volatility and correlation of commodity prices via a panel GARCH model. In theory, lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, we find that price volatility attributable to transitory shocks declines with interest rates, whereas particularly for metals prices, price correlation increases as interest rates decline.
- Subjects
INTEREST rates; MARKET volatility; GARCH model; PRICES -- Mathematical models; ECONOMIC shock
- Publication
Macroeconomic Dynamics, 2018, Vol 22, Issue 3, p600
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100516000389