IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Commodity Price Behavior With Storage Frictions

Listed author(s):
  • Evans, Lewis
  • Guthrie, Graeme

We present a competitive storage model of commodity prices featuring frictions that introduce an element of irreversibility into storage decisions. This leads to situations in which speculators do not trade in the spot market even though total storage is positive. As a result the market value of the stored commodity which is determined in the (financial) market for ownership of firms operating storage facilities can diverge from the spot price. Such price separation leads to the existence of an endogenous convenience yield which we show equals the expected excess return on a real option embedded in each unit of the stored commodity. The outputs of our model are consistent with the stylized facts regarding commodity price distributions including serial correlation and GARCH characteristics. Samuelson's hypothesis - that forward prices are less volatile than spot prices - does not hold in general.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://researcharchive.vuw.ac.nz/handle/10063/3966
Download Restriction: no

Paper provided by Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation in its series Working Paper Series with number 3966.

as
in new window

Length:
Date of creation: 2007
Handle: RePEc:vuw:vuwcsr:3966
Contact details of provider: Postal:
ISCR, PO Box 600, Victoria University Wellington 6140, New Zealand

Phone: +64 (4) 463 5562
Web page: http://www.iscr.co.nz/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 1-23.
  2. Michaelides, Alexander & Ng, Serena, 2000. "Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators," Journal of Econometrics, Elsevier, vol. 96(2), pages 231-266, June.
  3. Murray Carlson & Zeigham Khokher & Sheridan Titman, 2007. "Equilibrium Exhaustible Resource Price Dynamics," Journal of Finance, American Finance Association, vol. 62(4), pages 1663-1703, 08.
  4. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, 06.
  5. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-1022, July.
  6. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
  7. Chambers, Marcus J & Bailey, Roy E, 1996. "A Theory of Commodity Price Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 924-957, October.
  8. Ng, Victor K. & Pirrong, Stephen Craig, 1996. "Price dynamics in refined petroleum spot and futures markets," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 359-388, February.
  9. Amir Yaron & Leonid Kogan & Dmitry Livdan, 2004. "Futures Prices in a Production Economy with Investment Constraints," 2004 Meeting Papers 128, Society for Economic Dynamics.
  10. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
  11. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
  12. Brian D. Wright & Jeffrey C. Williams, 1984. "The Welfare Effects of the Introduction of Storage," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 169-192.
  13. Jaime Casassus & Pierre Collin-Dufresne & Bryan R. Routledge, 2005. "Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology," NBER Working Papers 11864, National Bureau of Economic Research, Inc.
  14. Brian D. Wright & Jeffrey C. Williams, 1989. "A theory of negative prices for storage," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(1), pages 1-13, 02.
  15. Ng, Serena, 1996. "Looking for evidence of speculative stockholding in commodity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 123-143.
  16. 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 1075-1093, December.
  17. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
  18. Kawai, Masahiro, 1983. "Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 435-459, June.
  19. Richard Heaney, 2006. "An empirical analysis of commodity pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(4), pages 391-415, 04.
  20. Kohn, Meir, 1978. "Competitive Speculation," Econometrica, Econometric Society, vol. 46(5), pages 1061-1076, September.
  21. Richard, Scott F. & Sundaresan, M., 1981. "A continuous time equilibrium model of forward prices and futures prices in a multigood economy," Journal of Financial Economics, Elsevier, vol. 9(4), pages 347-371, December.
  22. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233-233.
  23. Harrison Hong, 2000. "A Model of Returns and Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 959-988, 04.
  24. Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-230, April.
  25. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
  26. José A. Scheinkman & Jack Schechtman, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 427-441.
  27. 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 1517-1545, December.
  28. Ronald W. Anderson & Jean-Pierre Danthine, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 249-266.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:vuw:vuwcsr:3966. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Library Technology Services)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.