Pricing LME Commodity Futures Contracts
AbstractIt is generally argued that there is a link between commodity prices and stock levels and this paper provides a test of two economic models that attempt to explain commodity pricing, the stock-out model with two separate pricing states and the convenience yield model. Global stock levels are collected and interest-adjusted basis is calculated for the LME commodities, copper, lead and zinc spanning the period November 1964 to December 2003. A two-regime Markov model with an added stock variable appears to fit the data reasonably well, providing evidence supporting the existence of two separate commodity pricing regimes and the existence of a convenience yield effect that is inversely related to the level of stocks on hand.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 172.
Date of creation: 11 Aug 2004
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convenience yield; stockout; futures contracts; copper; lead; zinc;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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