On the transmission mechanism between the inventory arbitrage activity, speculative activity and the commodity price under the US QE policy: Evidence from a TVP-VAR model

Wei Yao and Constantinos Alexiou

International Review of Economics & Finance, 2024, vol. 89, issue PA, 1054-1072

Abstract: We investigate the transmission that relates the speculative activity, the inventory arbitrage activity, and the commodity price under the US quantitative easing (QE) policy. In this direction, a TVP-VAR model is adopted to test the transmission effect on seven commodities' prices using monthly data over the period 2003:4 to 2018:6. The evidence supports Frankel’s (2006) model on the transmission mechanism of the inventory arbitrage activity and the speculative activity on the effect of the real interest rate on commodities' real prices in the short run during the US QE policy period. Moreover, speculative activity appears to increase the effect of the interest rate on commodities' prices in the current period, whilst the evidence between inventory arbitrage activity and the interest rate on commodities' prices is found to be mixed. Further analysis indicates that the transmission of arbitrage activities concerning the effect of the interest rate on commodities' prices is influenced by the arbitrage condition between the commodity and the interest rate markets as well as the changes in commodities' futures basis. More specifically, the inventory arbitrage activities of precious metals and energy commodities play a significant role in transmitting the effect of the interest rate on their prices whilst energy commodities' price is more flexible than other commodities' prices in response to a shock from both inventory arbitrage and speculative activities. Lastly, the influence of the interest rate, the inventory arbitrage activity and the speculative activity is found to be stronger during the de-financialization period.

Keywords: QE policy; Commodity price; Speculative activity; Transmission mechanism (search for similar items in EconPapers)
JEL-codes: C50 E31 E4 F4 Q43 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056023003222
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:1054-1072

DOI: 10.1016/j.iref.2023.08.003

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().