Theory of storage, inventory and volatility in the LME base metals
AbstractThe theory of storage, as related to commodities, makes two predictions involving the quantity of the commodity held in inventory. When inventory is low (i.e. a situation of scarcity), spot prices will exceed futures prices, and spot price volatility will exceed futures price volatility. Conversely, during periods of no scarcity, both spot prices and spot price volatility will remain relatively subdued. We test these predictions for the six base metals traded on the London Metal Exchange (aluminium, copper, lead, nickel, tin and zinc), and find strong validation for the theory. Including Chinese inventories reported by the Shanghai Futures Exchange strengthens the relationship further. We also introduce the concepts of excess volatility, inventory-implied spot price and inventory-implied spot volatility and illustrate some applications.
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Bibliographic InfoArticle provided by Elsevier in its journal Resources Policy.
Volume (Year): 38 (2013)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/30467
Working curve; Storage; Base metals; Inventory; Volatility; Convenience yield; Futures curve;
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