Introduction

Not to put too fine a point on it, but the study of commodity prices has long been something of an academic stepchild. Most work on the subject is in the domain of specific fields, notably agricultural economics. Only a smattering of articles on the subject has appeared in broader publications, such as the Journal of Political Economy or the Journal of Finance.

Especially in finance, this relative obscurity arguably reflects the niche role of commodities in the broader financial markets, as compared to equity and fixed-income markets. But commodities are in the process of becoming mainstream. In the 1990s, and especially the 2000s, many major banks and investment banks have entered into commodities trading. Indeed, commodity trading – especially in energy – has become an important source of profits for major financial institutions such as Goldman Sachs, Morgan Stanley, and Citibank. Simultaneously, and relatedly, many investors have entered into the commodities market. In particular, pension funds and other portfolio managers have increasingly viewed commodities as a separate asset class that, when combined with traditional stock and bond portfolios, can improve risk-return performance. Furthermore, financial innovation has eased the access of previously atypical participants into the commodity markets. Notably, commodity index products (such as the GSCI, now the S&P Commodity Index) and exchange traded funds (ETFs) have reduced the transaction costs that portfolio managers and individual investors incur to participate in the commodities markets.