Pricing LME Commodity Futures Contracts
It is generally argued that there is a link between commodity prices and stock levels and this paper provides a test of two economic models that attempt to explain commodity pricing, the stock-out model with two separate pricing states and the convenience yield model. Global stock levels are collected and interest-adjusted basis is calculated for the LME commodities, copper, lead and zinc spanning the period November 1964 to December 2003. A two-regime Markov model with an added stock variable appears to fit the data reasonably well, providing evidence supporting the existence of two separate commodity pricing regimes and the existence of a convenience yield effect that is inversely related to the level of stocks on hand.
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|Date of creation:||11 Aug 2004|
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