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Futures basis, inventory and commodity price volatility: An empirical analysis

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  • Symeonidis, Lazaros
  • Prokopczuk, Marcel
  • Brooks, Chris
  • Lazar, Emese

Abstract

We 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 Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 6 ()
Pages: 2651-2663

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2651-2663

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Forward curves; Inventory; Commodity price volatility; Theory of storage; Convenience yield;

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Cited by:
  1. Floros, Christos & Salvador, Enrique, 2014. "Calendar anomalies in cash and stock index futures: International evidence," Economic Modelling, Elsevier, vol. 37(C), pages 216-223.
  2. John T. Cuddington & Arturo L. Va'squez Cordano, 2013. "Linkages between spot and futures prices: Tests of the Fama-French-Samuelson hypotheses," Working Papers 2013-09, Colorado School of Mines, Division of Economics and Business.
  3. Chiu, Yuan-Shyi Peter & Chang, Huei-Hsin, 2014. "Optimal run time for EPQ model with scrap, rework and stochastic breakdowns: A note," Economic Modelling, Elsevier, vol. 37(C), pages 143-148.

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