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Modelling and measuring price discovery in commodity markets

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  • Figuerola-Ferretti, Isabel
  • Gonzalo, Jesús

Abstract

In this paper we present an equilibrium model of commodity spot (st) and futures (ƒt) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modelling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-futures equilibrium relationship, st = β2ƒt + β3 When the slope of the cointegrating vector β2 > 1(β2

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Bibliographic Info

Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/15910.

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Date of creation: 12 Mar 2010
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Publication status: Published in Journal of Econometrics, 2010, nº 158, pp. 95-107 (2010-03-12) v., p.-
Handle: RePEc:ner:carlos:info:hdl:10016/15910

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Web page: http://www.uc3m.es

Related research

Keywords: Backwardation; Cointegration; Commodity markets; Contango; Convenience yield; Futures prices; Permanent-Transitory decomposition; Price discovery;

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References

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  1. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-99, September.
  2. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-49, Carnegie Mellon University, Tepper School of Business.
  3. Jaime Casassus & Pierre Collin-Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
  4. Roger D. Huang, 2002. "The Quality of ECN and Nasdaq Market Maker Quotes," Journal of Finance, American Finance Association, vol. 57(3), pages 1285-1319, 06.
  5. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, vol. 81(1), pages 27-60, July.
  6. Isabel Figuerola-Ferretti & Christopher L. Gilbert, 2005. "Price discovery in the aluminium market," Department of Economics Working Papers 0506, Department of Economics, University of Trento, Italia.
  7. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
  8. Gonzalo, Jesús & Pitarakis, Jean-Yves, . "Threshold Effects in Multivariate Error Correction Models," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3220, Universidad Carlos III de Madrid.
  9. Sapp, Stephen G., 2002. "Price Leadership in the Spot Foreign Exchange Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 425-448, September.
  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  11. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May.
  12. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, February.
  13. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
  14. deB. Harris, Frederick H. & McInish, Thomas H. & Wood, Robert A., 2002. "Security price adjustment across exchanges: an investigation of common factor components for Dow stocks," Journal of Financial Markets, Elsevier, vol. 5(3), pages 277-308, July.
  15. Bingcheng Yan & Eric Zivot, 2007. "The Dynamics of Price Discovery," Working Papers UWEC-2005-01-R, University of Washington, Department of Economics, revised Mar 2007.
  16. Brenner, Robin J. & Kroner, Kenneth F., 1995. "Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 23-42, March.
  17. Litzenberger, Robert H & Rabinowitz, Nir, 1995. " Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 50(5), pages 1517-45, December.
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Citations

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Cited by:
  1. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System," Discussion Papers of DIW Berlin 1139, DIW Berlin, German Institute for Economic Research.
  2. Mayordomo, Sergio & Peña Sánchez de Rivera, Juan Ignacio & Romo, Juan, 2011. "The effect of liquidity on the price discovery process in credit derivatives markets in times of financial distress," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/13814, Universidad Carlos III de Madrid.
  3. Grammig, Joachim G. & Peter, Franziska J., 2008. "International price discovery in the presence of market microstructure effects," CFR Working Papers 08-10, University of Cologne, Centre for Financial Research (CFR).
  4. Cifarelli, Giulio & Paladino, Giovanna, 2011. "Hedging vs. speculative pressures on commodity futures returns," MPRA Paper 28229, University Library of Munich, Germany.
  5. Guglielmo Caporale & Davide Ciferri & Alessandro Girardi, 2010. "Time-varying spot and futures oil price dynamics," Quaderni del Dipartimento di Economia, Finanza e Statistica 75/2010, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
  6. Wang, Jianxin & Yang, Minxian, 2011. "Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets," Journal of Financial Markets, Elsevier, vol. 14(1), pages 82-108, February.

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