Co-Movement of Commodity Prices and the Role of China in World Commodity Market
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Title Co-movement of commodity prices and the Role of China in World Commodity Market Table of ContentsAcknowledgement Abstract Introduction Motivation of the Study Theoretical Approach Literature resources Research Questions and Design Data resources Empirical Analysis Empirical Findings of the Research Unit-root Test in the Co-movement of Commodity Prices Cointegration Analysis for the co-movement of commodity prices of the select commodities Assessing the impact of Chinese Import demand on movement of commodity prices Impact of Macro-economic shocks on global price movement of the commodities Discussion and Conclusion Co-movement of Prices of unrelated commodities References Data Sources Appendix Acknowledgement It is a great pleasure and honour to acknowledge such persons whose support has been imperative to accomplish this study. At the very outset I express deepest gratitude to my supervisor Dr. for giving me strength and firmness to pursue this research study. His interventions; in understanding key terms, selection of data sample and guidance particularly on determining empirical methodology for this study. The precise notion of this study came from my informal discussion with my friends. I am grateful to them for their valuable discussion. Last but not the least I thank my family who has always been inspiring and caring. AbstractThe Analysis co-movement of commodity prices have got apt attention after (Pindyck & Rotemberg, 1988) and became rich in its estimation techniques and scope. This study have attempted to assess the movement of prices of three sets of commodities; beverages, oil and copper, in the time period of 2005 to 2014 by using cointegration and VECM models. It observed that there is a high rank cointegration in price movements, and the role of Chinese trade activity has limited influence on the global price movements. The impact of macro-economic shocks are also not universal in price movements of the selected sets of commodities. Co-movement of commodity prices and the Role of China in World Commodity MarketIntroduction The co-movement of commodity prices has been a matter of investigation for a long time (Pindyck & Rotemberg, 1988), (Debb, et al., 1996) to recent past (Fernandez, 2015). Various econometric models have been used for this analysis from vector auto regression models (Roache, 2012) to VAR-DCC-GARCH (Yue, et al., 2015). This study is an attempt to revisit the co-movement of world commodity prices from a different perspective. There are two things which this study aims to explore through econometric analysis one being the role of Chinese trade and its influence on the co-movement of the commodity prices. And second, the impact of financial crisis and its impact of the co-movement of the commodity prices during and after the financial crisis. In this view the background of the study is based on series of earlier investigations of co-movement of commodity prices, linkages between primary commodity and energy price with an advancement of inclusion of the trade of one of the emerging trading country of the world as the influencing factors in the co-movement of the commodity prices.
China’s presence in world trade is recognized very well, at the same time the role of China in world commodity market was also important to understand (Roache, 2012). Understanding Chinese commodity market and its impact on demand shocks of the world commodity market has generated interest of many researchers. The dissertation would focus on analyzing the relationship between the price movements of different commodities in and the demand shock generated from China into different commodity markets of the world. As is known to all, the economists are trying hard to project the price movements of the commodity prices which are believed to be affected by business cycles. Another thing which affect the business cycle is the movement of trade balances and its constituents. Also, since commodities are commonly used as the raw materials for many industries in the world, their prices would ultimately affect the cost of input and therefore the ultimate profitability of the industries. China is importing metals from Australia The potential volatility in the commodity prices could lead to shocks in the economy as it is recognized that the changes in commodity prices are associated with macroeconomic volatility (Alquist & Coibion, 2013). Therefore, a very important task for economist is that the price movements of commodities are carefully analyzed.In view of above illustration regarding China’s role in the global commodity trade is very important. This is aiming to investigate this emphatic presence of China in the global commodity market and its influence over the co-movement in the commodity prices. Roache (2012) have analyzed the role of China in global commodity market in terms of consumption demand in China for the goods and commodities which are traded in the world market. In other studies the role of United States have been categories in influencing global movement of the commodity prices. This will consider the role of China beyond the technical specification of the financialization of the commodity market, role of forecasting and the eventual demand and supply shocks. Since China has been one of the key exporter and import countries for the global commodities it is important to underline its influence while keeping the technical factors aside. In this study only the impact of import of the selected set of the commodities will be analyzed due to limitation and scope of the study.