This thesis intends to study the mechanism behind the commodity futures term structure, and the interaction between commodity markets, particularly the crude oil market, and the macroeconomic indicators in the real economy. The first part of thesis comprises a comprehensive review of the relevant literature, revealing that, although there has been extensive investigation into commodity prices and their term structure modelling, based on either ``pure macro'' or ``pure finance'' perspectives, the discussion of their joint application, remains very limited. The subsequent preliminary data analysis highlights some other concerns in respect to this subject area, such as the effect of the unit root, commonly observed in the commodity price related models, and its possible solution. On the basis of these observations, I propose two models to add to the existing literature.
The second part of this thesis proposes a joint affine term structure model for multiple commodity futures contracts. In this model, the instantaneous short rate factor is a pure latent variable, and is jointly determined by several commodity markets. The empirical evidence, presented in this part, suggests that the path of this ``commodity market implied short rate factor'' is consistent with the policy rate. It reveals that the expectation in respect to the interest rate in the commodity market reflects and anticipates developments in monetary policy.
The third part of this thesis presents a macro-finance model for the economy and the oil market, allowing us to study interactions between the convenience yield, the spot and futures markets, monetary policy and macroeconomic variables. I use the Kalman filter to represent latent variables that handle the effects of exogenous shocks to inflation and the oil price, and to deal with missing observations. Traditional models use latent variables, with little economic meaning, to explain commodity futures, while this model makes the effect of macroeconomic variables explicit. I find a significant interaction between the economy and the oil markets, including an important link in the monetary transmission mechanism, running from the policy interest rate to the convenience yield, oil price and hence inflation and policy transmission.
