Concentrated Production and Conditional Heavy Tails in Commodity Returns

摘要

I study the impact of commodity production concentration on the occurrence of extreme commodity returns. I explore this issue in a sample of 22 agricultural, mineral and energy commodities of global scope that are liquidly traded through futures at the most important exchanges. I find that measures of production concentration such as the Herfindahl index computed on national shares of global output, or the market share of the top three producers, had significant and positive effect on measures of extreme returns during 1995-2012, as implied by daily return kurtosis or the shape parameter of the distribution of extreme returns. Volatility persistence appears unlikely to generate the cross sectional kurtosis observed empirically unless heavy tailed conditional returns are also included in the dynamics. The results are economically significant and robust to the inclusion of controls for inventories, futures liquidity, and country size. These findings are consistent with a simple mechanism of aggregation of globally distributed local supply shocks that impact global supply and hence commodity prices. (c) 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:46-65, 2016