Futures Prices in a Production Economy with Investment Constraints
AbstractWe document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a \V-shape". This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying elasticity of supply. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints a?ect ?rms investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the elasticity of supply of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply elasticity results in time-varying volatility of futures prices. Calibrating this model, we show it is quantitatively consistent with the aforementioned V-shape" relationship between the volatility of futures prices and the slope of the term-structure
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 128.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Futures prices; Invest; ment Constraints;
Other versions of this item:
- Leonid Kogan & Dmitry Livdan & Amir Yaron, 2005. "Futures Prices in a Production Economy with Investment Constraints," NBER Working Papers 11509, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-DGE-2004-08-02 (Dynamic General Equilibrium)
- NEP-FIN-2004-08-02 (Finance)
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