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1 May 2014 CFA Institute Journal Review

Understanding International Commodity Price Fluctuations (Digest Summary)

  1. Marc L. Ross, CFA

The authors summarize critical themes contained in a series of papers in a special issue of the Journal of International Money and Finance. The contributors’ research focuses on ongoing developments in commodity prices.

What’s Inside?

Commodity price volatility in the recent past has piqued researchers’ efforts to understand these prices better. At a conference jointly sponsored by the International Monetary Fund and the University of Oxford, the research on this phenomenon was explored. The authors review the presented papers thematically and consider commodities as a separate asset class, trends in commodity price forecasting, and the emergence of new energy supply sources.

How Is This Research Useful to Practitioners?

The conference contributors presented evidence on the “financialization” of commodity prices in light of speculation, inventories, food price bubbles, the efficient market hypothesis, and reflexivity theory. In particular, oil and food futures markets were examined. Financialization can have such positive impacts as hedging and risk sharing. The authors examine the debate on how trading contributed to the commodity price spike from 2005 to 2008.

They also consider inputs that affect price trends, as well as innovation in price forecasting techniques. Examples are government price subsidies for the former and the examination of co-movement between commodity prices and futures prices to capture the drivers behind price cycles for the latter.

The authors’ discussion concludes with an overview of the changing energy landscape, a relatively new area of academic research. New energy sources present both opportunities and challenges in the areas of renewable resources, environmental safeguards, and shifting geopolitical relationships. Policy often plays a pivotal role in the burgeoning alternative energy market. Greater focus on and allocation of resources to a particular energy source may crowd out more-cost-effective renewables. Regarding the evolution of commodities as a distinct asset class, governments need to enhance price transparency, which would enable market participants to hedge price risk more effectively. Enhancement is needed in the oversight authorities and regulations that are seeking to eliminate fraud and such other abuses as market manipulation.

Students of econometrics as well as policymakers would find the authors’ summary a good point of departure for further study of commodity price dynamics, including the effects of policymakers’ own regulatory actions. A better understanding of pricing and behavior could potentially lead to more-effective regulation of markets and participants.

How Did the Authors Conduct This Research?

The authors’ article is based on the main points of each of the underlying studies related to the financialization of the commodities market. The resulting article provides a balanced summary and analysis.

Abstractor’s Viewpoint

Financial markets evolve with ever-greater speed and complexity. The authors’ synopsis of the conference presentations attests to this evolution. Commodities have become a robust asset class, their alternative status notwithstanding. A better understanding of their composition and function can lead to their having a more effective role in price discovery and hedging, as well as better oversight and regulation.

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