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Modelling and measuring price discovery in commodity markets

  • Gonzalo, Jesús
  • Figuerola-Ferretti, Isabel

In this paper we present an equilibrium model of commodity spot (St) and future (Ft) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modeling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-future equilibrium relationship, (St-ß2Ft ). When the slope of the cointegrating vector ß2>1 (ß2

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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía de la Empresa in its series DEE - Working Papers. Business Economics. WB with number wb074510.

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Date of creation: May 2007
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Handle: RePEc:cte:wbrepe:wb074510
Contact details of provider: Web page: http://www.business.uc3m.es/es/index

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  1. 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.
  2. Gonzalo, Jesùs & Pitarakis, Jean-Yves, 2005. "Threshold effects In multivariate error correction models," Discussion Paper Series In Economics And Econometrics 0501, Economics Division, School of Social Sciences, University of Southampton.
  3. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-50, Carnegie Mellon University, Tepper School of Business.
  4. John Y. Campbell & Motohiro Yogo, 2003. "Efficient Tests of Stock Return Predictability," NBER Working Papers 10026, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. Gonzalo, Jesús & Figuerola-Ferretti, Isabel, 2008. "Modelling and Measuring Price Discovery in Commodity Markets," DEE - Working Papers. Business Economics. WB 15951, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  8. Richard Heaney, 2002. "Approximation for convenience yield in commodity futures pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(10), pages 1005-1017, October.
  9. 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.
  10. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
  11. 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.
  12. 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.
  13. 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.
  14. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
  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. 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.
  17. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  18. 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.
  19. 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.
  20. Isabel Figuerola‐Ferretti & Christopher L. Gilbert, 2005. "Price discovery in the aluminum market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(10), pages 967-988, October.
  21. 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.
  22. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, May.
  23. 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.
  24. 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.
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