Soybean Inventory and Forward Curve Dynamics
AbstractWe present two results concerning soybean prices. First, we exhibit a simple relationship between stocks and price volatility. The observation of an increasing price volatility with decreasing inventory is often mentioned in the literature, but has so far been documented using a proxy for inventory (see Fama and French 1987, 1988; Litzenberger and Rabinowitz 1995). Instead, we reconstruct a yearly, quarterly, and monthly database of worldwide soybean inventories using aggregate data from the United States, Brazil, and Argentina. We show that under all time scales, price volatility is an increasing linear function of inverse inventory, which we term "scarcity." Second, we show how the addition of the factor scarcity in a state-variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit. We document this property on a 25-year database of CBOT futures contracts and show that the superior accuracy also affects long-maturity futures contracts, an important property for the valuation of long-term origination contracts between producing countries and the agrifood industry.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/1937.
Date of creation: Jul 2005
Date of revision:
Publication status: Published in Management Science, 2005, Vol. 51, no. 7. pp. 1076-1091.Length: 15 pages
Scarcity-related volatility; State variables; Term structure of soybean forward prices;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
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