Title: Investigating bubbles in commodity prices by market expectations and determinants of dynamic persistence
Authors: Robinson Kruse-Becher - FernUniversität in Hagen (Germany)
Tam Nguyen-Huu - Leuphana University Lueneburg (Germany)
Christoph Wegener - Leuphana University Lueneburg (Germany) [presenting]
Abstract: Speculative bubbles have received a great deal of attention in the recent years by academics, policy makers and investors. One main research question relates to the important issue whether fundamentals are able to explain temporary explosive behavior in these commodity prices. We consider a set of seven unrelated commodities, i.e. wheat, copper, silver, sugar, soybean, cotton, and cattle, over the period between 1992 and 2019 at a monthly frequency. In a first step, we provide clear empirical evidence for multiple explosive episodes and find that these periods are cross-correlated. In a second step, we rely on model averaging techniques to explain the time-varying persistence of commodity prices with a large set of nearly two hundred potential determinants. The advantage of this approach is the avoidance of problems relating to the pre-specification of proxies for the fundamentals. As a comparison, we use a recently proposed approach which is based on market expectations of future prices. These two approaches are quite distinct in their nature. In our empirical analysis, we tackle the question whether dynamic persistence and explosive periods are related to fundamental explanations and provide corresponding conclusions.