fbpx Effects of Speculation and Interest Rates in a 'Carry Trade' Model of Commodity Prices | Harvard Kennedy School

HKS Authors

See citation below for complete author information.

Abstract

The paper presents and estimates a model of the prices of oil and other storable commodities, a model that can be characterized as reflecting the carry trade. It focuses on speculative factors, here defined as the trade-off between interest rates on the one hand and market participants' expectations of future price changes on the other hand. It goes beyond past research by bringing to bear new data sources: survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk. Some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today's commodity prices.

Citation

Frankel, Jeffrey A. "Effects of Speculation and Interest Rates in a 'Carry Trade' Model of Commodity Prices." Journal of International Money and Finance 42 (April 2014): 88-112.