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Arbitrage Conditions, Interest Rates, and Commodity Prices

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Author Info

  • Kitchen, John
  • Denbaly, Mark

Abstract

This research examines the arbitrage condition between Financial markets and commodity markets According to the standard arbitrage condition, for risk-neutral investors to be indifferent between holding securities or commodities, the expected commodity price appreciation, adjusted for physical storage costs, must equal the rate of return on financial assets For agritcultural commodities, however, the convenience yield drives a wedge between the interest return and the commodity price spread Empirical results support this position, but also provide evidence that the commodity price spread properly incorporates interest costs

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File URL: http://purl.umn.edu/136728
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Bibliographic Info

Article provided by United States Department of Agriculture, Economic Research Service in its journal Journal of Agricultural Economics Research.

Volume (Year): (1987)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:ags:uersja:136728

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Related research

Keywords: Commodity prices; interest rates; arbitrage; Agricultural Finance; Demand and Price Analysis; Financial Economics;

References

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  1. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. Bilson, John F O, 1985. "Macroeconomic Stability and Flexible Exchange Rates," American Economic Review, American Economic Association, vol. 75(2), pages 62-67, May.
  4. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
  5. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-38, November.
  6. Husted, Steven & Kitchen, John, 1985. "Some Evidence on the International Transmission of U.S. Money Supply Announcement Effects," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 456-66, November.
  7. Kitchen, John & Denbaly, Mark, 1987. "Commodity Prices, Money Surprises, and Fed Credibility: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 246-51, May.
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Cited by:
  1. Hector O. Zapata & T. RANDALL FORTENBERY, 1995. "Stochastic Interest Rates and Price Discovery in Selected Commodity Markets," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 383, Wisconsin-Madison Agricultural and Applied Economics Department.
  2. Hector O. ZAPATA & T. Randall FORTENBERY, 1995. "Stochastic Interest Rates And Price Discovery In Selected Commodity Markets," Staff Papers 383, University of Wisconsin Madison, AAE.

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