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How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock

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  • Nese Erbil
  • Shaun K. Roache
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    Abstract

    How does a commodity market adjust to a temporary scarcity shock which causes a shift in the slope of the futures price curve? We find long-run relationships between spot and futures prices, inventories and interest rates, which means that such shocks lead to an adjustment back towards a stable equilibrium. We find evidence that the adjustment is somewhat consistent with well-known theoretical models, such as Pindyck (2001); in other words, spot prices rise and then fall, while inventories are used to absorb the shock. Importantly, the pace and nature of the adjustment depends upon whether inventories were initially high or low, which introduces significant nonlinearities into the adjustment process.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/222.

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    Length: 35
    Date of creation: 01 Sep 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/222

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    Related research

    Keywords: Commodity markets; Commodity prices; Economic models; External shocks; Price adjustments; inventories; futures price; futures prices; inventory; contango; backwardation; futures contract; financial assets; futures markets; financial markets; financial economics; futures market; commodity futures; futures contracts; commodities futures; derivative; bond;

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    1. Wu, Yangru & Zhang, Hua, 1997. " Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields," Review of Quantitative Finance and Accounting, Springer, vol. 8(1), pages 69-81, January.
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    Cited by:
    1. David A Reichsfeld & Shaun K. Roache, 2011. "Do Commodity Futures Help Forecast Spot Prices?," IMF Working Papers 11/254, International Monetary Fund.

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