Pricing LME Commodity Futures Contracts

Richard Heaney

No 172, Econometric Society 2004 Australasian Meetings from Econometric Society

Abstract: 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.

Keywords: convenience yield; stockout; futures contracts; copper; lead; zinc (search for similar items in EconPapers)
JEL-codes: C22 G13 (search for similar items in EconPapers)
Date: 2004-08-11
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:ausm04:172

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