Commodity price dynamics in the 21st Century

Sebastian Essl
2009 unpublished
This diploma thesis analyses the empirical behaviour of commodity prices in the 21st century. A comprehensive reconsideration of commodity price dynamics is of great contemporary importance not only to evaluate the present state of the world economy but also for political stability, especially in developing countries. The purpose of this study is to elaborate whether commodity price dynamics can be explained without the influence of speculation in commodity futures markets. Within the first
more » ... of the study, two theoretical perceptions of financial markets are opposed, i.e. the hypothesis of efficient markets versus the hypothesis of inefficient markets. This procedure shall highlight possible shortcomings of real commodity futures markets. In the second part of the study, the author formulates the hypothesis that destabilizing speculation has considerably influenced commodity prices in the 21st century. In order to prove this position, the behaviour of copper, corn, crude oil, gold and wheat prices are analysed in a general to specific approach. The results of the empirical analysis of key commodities prices support the author's hypothesis that speculation influenced commodity prices. An analysis of supply and demand conditions and parallel price movements shows that market fundamentals did not account for the extent of price increases after 2003. Furthermore, prices were not normally distributed after 1990, which rules out the proposition that price changes followed a random walk, a major argument of the efficiency hypothesis. Strong evidence in support of the author's hypothesis results also from the dependence of prices over time and the considerably high inter-correlations of different commodities. The results of this study credibly suggest that the functioning of commodity markets after 2003 has not been in line with the efficiency hypothesis.
doi:10.25365/thesis.8001 fatcat:5zh6wtrgofempfi4o66ma2hwtm