Commodity Modeling and Pricing: Methods for Analyzing Resource Market Behavior

PART One

Dynamics of Commodity Price Behavior

At times the prices of many commodities display volatile behaviors. Since agricultural commodities and minerals, such as crude oil and metals, are among the fundamental inputs of our economies on the production and/or the consumption side, price volatility causes disruptions and can lead to crises. An improved understanding of the dynamics of price behavior is therefore highly desirable from a policy as well as from a consumer and supplier perspective.

Part One consists of four chapters, each written from a different point of view. In Chapter 1, the recently retired chief economist of Arcelor-Mittal and two colleagues from academia present a new method for estimating long memory processes from small samples, a common problem in industry, where forecasts frequently have to be made from very short series. This contribution provides a theoretically sound and interesting solution to a practical problem.

While the first chapter takes an industry and firm perspective, the second chapter analyzes time-series data to study the link between commodity price developments and business cycles. The question asked many times is whether commodity prices lead inflation or inflation leads commodity prices. The answer is not immediately visible from looking at the data, because trends can be obscured by short-run occurrences. This chapter’s analysis offers a method to uncover the true trend and provides evidence that, on balance, commodity prices are ...