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The Present Value Model of Rational Commodity Pricing

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  • Robert S. Pindyck

Abstract

The present value model relates an asset's price to the sum of its discounted expected future payoffs. I explore the limits of the model by testing its ability to explain the pricing of storable commodities. For commodities the payoff stream is the convenience yield that accrues from holding inventories, and it can be measured directly from spot and futures prices. Hence the model imposes restrictions on the joint dynamics of spot and futures prices, which I test for four commodities. I find close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same for the serial dependence of excess returns, These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4083.

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Date of creation: Jul 1993
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Handle: RePEc:nbr:nberwo:4083

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  1. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. repec:fth:inseep:8909 is not listed on IDEAS
  3. Pindyck, Robert S., 1990. "Inventories and the short-run dynamics of commodity prices," Working papers 3133-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  5. Mankiw, N.G. & Romer, D. & Shapiro, M.D., 1989. "Stock Market Forecastability And Volatility: A Statistical Appraisal," Papers 89-21, Michigan - Center for Research on Economic & Social Theory.
  6. French, Kenneth R., 1983. "A comparison of futures and forward prices," Journal of Financial Economics, Elsevier, vol. 12(3), pages 311-342, November.
  7. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991. "Speculative Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 529-46, May.
  8. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  9. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
  10. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
  11. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
  12. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  13. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
  14. Pindyck, Robert S & Rotemberg, Julio J, 1993. "The Comovement of Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1073-1104, November.
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