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

215 Pages·2021·5.84 MB·English
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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

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