The Economics and Finance of Commodity Price Shocks (Banking, Money and International Finance)

215 Pages·2021·5.84 MB·English

by  Mikidadu Mohammed

The Economics and Finance of
Commodity Price Shocks
The behaviour of commodity prices never ceases to marvel economists, fnancial
analysts, industry experts, and policymakers. Unexpected swings in commodity
prices used to occur infrequently but have now become a permanent feature of
global commodity markets. This book is about modelling commodity price shocks.
It is intended to provide insights into the theoretical, conceptual, and empirical
modelling of the underlying causes of global commodity price shocks.
Three main objectives motivated the writing of this book. First, to provide a
variety of modelling frameworks for documenting the frequency and intensity of
commodity price shocks. Second, to evaluate existing approaches used for forecast-
ing large movements in future commodity prices. Third, to cover a wide range and
aspects of global commodities including currencies, rare–hard–lustrous transition
metals, agricultural commodities, energy, and health pandemics. Some attempts
have already been made towards modelling commodity price shocks. However,
most tend to narrowly focus on a subset of commodity markets, i.e., the agricul-
tural commodities market and/or the energy market. In this book, the author moves
the needle forward by operationalizing different models, which allow researchers
to identify the underlying causes and effects of a wide range of commodity price
shocks. Readers also learn about different commodity price forecasting models.
The author presents the topics to readers assuming less prior or specialist knowl-
edge. Thus, the book is accessible to industry analysts, researchers, undergraduate
and graduate students in economics and fnancial economics, academic and profes-
sional economists, investors, and fnancial professionals working in different sectors
of the commodity markets. Another advantage of the book’s approach is that read-
ers are not only exposed to several innovative modelling techniques to add to their
modelling toolbox but they are also exposed to diverse empirical applications of the
techniques presented.
Mikidadu Mohammed, Ph.D., is Assistant Professor of Economics at Austin Col-
lege. His research focuses on the underlying causes of energy price shocks, their
macroeconomic effects, and appropriate policy responses. Some of his recent work
has been on the causal relationship between oil production and economic growth
and development. He has also conducted research on the oil price–current account
nexus for advanced and developing countries where he examined whether a coun-
try’s level of fnancial development matters in explaining the sensitivity of current
account balance to oil price fuctuations. Dr. Mohammed has published in several
highly ranked economic journals and has been invited to give talks at many insti-
tutions and conferences. He is also the Co-Director of the Austin College–Dallas
Federal Reserve Bank Economics Scholars Program.
Banking, Money and International Finance
Carbon Risk and Green Finance
Aaron Ezroj
Infation Targeting and Central Banks
Institutional Set-ups and Monetary Policy Effectiveness
Joanna Niedźwiedzińska
Global Stock Market Development
Quantitative and Behavioural Analysis
Marcin Kalinowski
The Digitalization of Financial Markets
The Socioeconomic Impact of Financial Technologies
Edited by Adam Marszk and Ewa Lechman
The Digital Disruption of Financial Services
International Perspectives
Edited by Ewa Lechman and Adam Marszk
The Economics and Finance of Commodity Price Shocks
Mikidadu Mohammed
Mergers, Acquisitions, and International Financial Regulation
Analysing Special Purpose Acquisition Companies
Daniele D’Alvia
For more information about this series, please visit: www.routledge.com/
series/BMIF
The Economics and Finance of
Commodity Price Shocks
Mikidadu Mohammed
First published 2022
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2022 Mikidadu Mohammed
The right of Mikidadu Mohammed to be identifed as author of this
work has been asserted in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identifcation and
explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Mohammed, Mikidadu, author.
Title: The economics and fnance of commodity price shocks /
Mikidadu Mohammed.
Description: Abingdon, Oxon; New York, NY : Routledge, 2022. |
Series: Banking, money and international fnance | Includes
bibliographical references and index.
Identifers: LCCN 2021029306 (print) | LCCN 2021029307 (ebook) |
ISBN 9781032033693 (hardback) | ISBN 9781032033709 (paperback) |
ISBN 9781003186984 (ebook)
Subjects: LCSH: Prices—Econometric models. | Supply and
demand—Econometric models.
Classifcation: LCC HB221 .M56 2022 (print) | LCC HB221 (ebook) |
DDC 338.5/2—dc23
LC record available at https://lccn.loc.gov/2021029306
LC ebook record available at https://lccn.loc.gov/2021029307
ISBN: 978-1-032-03369-3 (hbk)
ISBN: 978-1-032-03370-9 (pbk)
ISBN: 978-1-003-18698-4 (ebk)
DOI: 10.4324/9781003186984
Typeset in Times New Roman
by codeMantra
To my wife, Munira, and kids, Aziz and Adamiya.

Contents
List of fgures ix
List of tables xi
Acknowledgements xiii
1 Introduction 1
2 History and theories of commodity price shocks 3
3 Modelling commodity price shocks 13
4 Commodity price shocks identifcation 25
5 Effects of commodity price shocks 33
6 Applications 43
7 Commodity price forecasting 78
8 Risks associated with commodity price forecasts 97
9 Conclusion 100
Bibliography 105
Glossary 114
Appendix 130
Index 195

Figures
6.1 Impulse responses to fnancialization and speculative shocks 49
6.2 Cumulative responses of the US EFFR and China LPR to
fnancialization and speculative shocks 50
6.3 Historical evolution of structural shocks (1973–2017) 54
6.4 VAR test for seasonal variations in monetary policy shocks 55
6.5 VAR test for seasonal variations in aggregate demand
shock. Null: No serial correlation at lag h 56
6.6 VAR test for seasonal variations in exchange rate market-
specifc shocks. Null: No serial correlation at lag h 57
6.7 Responses of NZD and NWK to global currency shocks 59
6.8 Plots of CUSUM and CUSUMSQ for the estimated
ARDL models (NZD) 60
6.9 Plots of CUSUM and CUSUMSQ for the estimated
ARDL models (NWK) 60
6.10 Nominal and real tantalum price (US dollars per kg of Ta O ) 62
2 5
6.11 Indicator of Net Tantalum Price Decrease (NTPD) 63
6.12 Impulse responses to world tantalum shocks 65
6.13 Impulse responses of top coffee stocks to global coffee shocks 71
6.14 Impulse responses to pandemic uncertainty shock 74
6.15 Inverse roots of AR (unit circle) 75
A.1 Historical evolution of structural shocks (2001–2020) 132
A.2 Impulse responses of returns to capital to uncertainty
shock, output shock, and volatility shock 133
A.3 Impulse responses of ROP to structural shocks 138
A.4a Impulse responses of infation and real GDP to oil supply
shock by country 140
A.5a Impulse responses of infation and real GDP to aggregate
demand shock by country 144
A.6a Impulse responses of infation and real GDP to oil-specifc
demand shock by country 147
A.7a Impulse responses of infation and real GDP to CPI shock
by country 150