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Futures basis, inventory and commodity price volatility: An empirical analysis

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  • Symeonidis, Lazaros
  • Prokopczuk, Marcel
  • Brooks, Chris
  • Lazar, Emese

Abstract

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993-2011 to empirically analyze the behaviour of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we explore the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom period.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39903.

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Date of creation: 04 Jul 2012
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Handle: RePEc:pra:mprapa:39903

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Keywords: Forward curves; inventory; commodity price volatility; theory of storage; convenience yield;

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Cited by:
  1. Floros, Christos & Salvador, Enrique, 2014. "Calendar anomalies in cash and stock index futures: International evidence," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 216-223.
  2. Weerawich Roekchamnong & Pongsa Pornchaiwiseskul & Anant Chiarawongse, 2014. "The Effects of Uncertainties on Inventory Management of Petroleum Products: A Case Study of Thailand," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 4(3), pages 380-390.
  3. John T. Cuddington & Arturo L. Va'squez Cordano, 2013. "Linkages between spot and futures prices: Tests of the Fama-French-Samuelson hypotheses," Working Papers, Colorado School of Mines, Division of Economics and Business 2013-09, Colorado School of Mines, Division of Economics and Business.
  4. Chiu, Yuan-Shyi Peter & Chang, Huei-Hsin, 2014. "Optimal run time for EPQ model with scrap, rework and stochastic breakdowns: A note," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 143-148.

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