Comparison of commodity future pricing approaches with cointegration techniques

Christian Stepanek ()
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Christian Stepanek: Institute of Materials Resource Management, University of Augsburg, 86135 Augsburg, Germany

Journal of Financial Engineering (JFE), 2015, vol. 02, issue 01, 1-31

Abstract: Commodity future prices are explained either by price expectations and a risk premium in the theory of normal backwardation or with the theory of storage in a cost of carry valuation. Both approaches are compared in separate equations with Johansen cointegration tests. The data sample contains five LME metals with maturities of 3–27 months and real inventory data. It is found that expected spot prices explain only short maturity future prices. But the cost of carry approach, with the inventory level-dependent convenience yield, explains prices for all maturities.

Keywords: Commodity futures; theory of normal backwardation; theory of storage; risk premium; convenience yield (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S2345768615500026

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