Commodity Pricing: Evidence from Rational and Behavioral Models

In this paper, we study commodity pricing, commodity price volatility and predictability. Our emphasis is on the econometric identification of market expectations about the convenience yield and of discount rates dynamics. To... [ view full abstract ]

In this paper, we study commodity pricing, commodity price volatility and predictability. Our emphasis is on the econometric identification of market expectations about the convenience yield and of discount rates dynamics. To explain commodity prices and return volatility, we consider both a classical fundamental-based model with a rational representative agent and a behavioral extension with heterogeneous agents, thus formally examining the role of speculators, in particular in relation to the super cycle in commodities and the time period most associated with so-called financialization of commodities. We examine a total of 15 commodities covering agriculture, softs, energy and metals and a sample where possible covers the period from 1971 to 2015. In all cases, especially in the final part of the sample period, we reject the restrictions associated with the rational representative agent model, in contrast to the conclusions reached by Pindyck (1993), also when we allow for time varying risk free rates and time varying risk premiums. To the contrary, the behavioral model with agents with heterogenous investment horizons exhibits a much closer empirical fit.