Futures basis, inventory and commodity price volatility: An empirical analysis
AbstractWe employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Forward curves; Inventory; Commodity price volatility; Theory of storage; Convenience yield;
Other versions of this item:
- Symeonidis, Lazaros & Prokopczuk, Marcel & Brooks, Chris & Lazar, Emese, 2012. "Futures basis, inventory and commodity price volatility: An empirical analysis," MPRA Paper 39903, University Library of Munich, Germany.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- G00 - Financial Economics - - General - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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