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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 behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze 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.

Suggested Citation

  • Symeonidis, Lazaros & Prokopczuk, Marcel & Brooks, Chris & Lazar, Emese, 2012. "Futures basis, inventory and commodity price volatility: An empirical analysis," Economic Modelling, Elsevier, vol. 29(6), pages 2651-2663.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2651-2663
    DOI: 10.1016/j.econmod.2012.07.016
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    Cited by:

    1. Sévi, Benoît, 2015. "Explaining the convenience yield in the WTI crude oil market using realized volatility and jumps," Economic Modelling, Elsevier, vol. 44(C), pages 243-251.
    2. 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, vol. 37(C), pages 143-148.
    3. repec:eee:jrpoli:v:52:y:2017:i:c:p:277-283 is not listed on IDEAS
    4. Floros, Christos & Salvador, Enrique, 2014. "Calendar anomalies in cash and stock index futures: International evidence," Economic Modelling, Elsevier, vol. 37(C), pages 216-223.
    5. repec:kap:ecopln:v:50:y:2017:i:3:d:10.1007_s10644-017-9210-9 is not listed on IDEAS
    6. John T. Cuddington & Arturo L. Va'squez Cordano, 2013. "Linkages between spot and futures prices: Tests of the Fama-French-Samuelson hypotheses," Working Papers 2013-09, Colorado School of Mines, Division of Economics and Business.
    7. Santeramo, Fabio Gaetano & Lamonaca, Emilia & Contò, Francesco & Stasi, Antonio & Nardone, Gianluca, 2017. "Drivers of grain price volatility: a cursory critical review," MPRA Paper 79427, University Library of Munich, Germany.
    8. repec:eee:jbfina:v:86:y:2018:i:c:p:143-158 is not listed on IDEAS
    9. Raphaël Chiappini & Yves Jégourel, 2014. "Futures Market Volatility, Exchange Rate Uncertainty and Cereals Exports: Empirical Evidence from France," GREDEG Working Papers 2014-34, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    10. Stefan Ederer & Christine Heumesser & Cornelia Staritz, 2016. "Financialization and commodity prices -- an empirical analysis for coffee, cotton, wheat and oil," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 462-487, July.
    11. Adrian Fernandez-Perez & Bart Frijns & Ana-Maria Fuertes & Joelle Miffre, 2018. "The skewness of commodity futures returns," Post-Print hal-01678744, HAL.
    12. Karapanagiotidis, Paul, 2014. "Dynamic modeling of commodity futures prices," MPRA Paper 56805, University Library of Munich, Germany.
    13. Fouquau, Julien & Six, Pierre, 2015. "A comparison of the convenience yield and interest-adjusted basis," Finance Research Letters, Elsevier, vol. 14(C), pages 142-149.
    14. 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, vol. 4(3), pages 380-390.
    15. Nicolas Merener, 2016. "Concentrated Production and Conditional Heavy Tails in Commodity Returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(1), pages 46-65, January.
    16. Miffre, Joëlle, 2016. "Long-short commodity investing: A review of the literature," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 3-13.

    More about this item

    Keywords

    Forward curves; Inventory; Commodity price volatility; Theory of storage; Convenience yield;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G00 - Financial Economics - - General - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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