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Interest rates, commodity prices, and the cost‐of‐carry model

Jacques A. Schnabel (School of Business and Economics, Wilfrid Laurier University, Waterloo, Canada)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 2 March 2010

1264

Abstract

Purpose

The purpose of this paper is to examine the nexus between interest rate changes and commodity spot prices.

Design/methodology/approach

The cost‐of‐carry model of simultaneous equilibrium in commodity spot and futures prices is employed to gauge the effects induced by interest rate changes. Results depend crucially on the type of expectations that prevail for the commodity market in question.

Findings

Under mean‐reverting expectations, an increase (decrease) in the interest rate will cause the spot price to drop (increase) and commodity suppliers to dishoard (hoard) inventories. Under invariant expectations, the change in the interest rate induces no change in the spot price and no hoarding/dishoarding behavior among commodity suppliers. Under momentum expectations, an increase (decrease) in the interest rate will cause the spot price to increase (drop) and suppliers to hoard (dishoard) inventories.

Practical implications

The effects of monetary policy actions on commodity spot prices can be gauged employing the simple model developed here.

Originality/value

A novel application of the cost‐of‐carry model is presented.

Keywords

Citation

Schnabel, J.A. (2010), "Interest rates, commodity prices, and the cost‐of‐carry model", Journal of Risk Finance, Vol. 11 No. 2, pp. 221-223. https://doi.org/10.1108/15265941011025215

Publisher

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Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

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