Futures basis, inventory and commodity price volatility: An empirical analysis
Marcel Prokopczuk (),
Chris Brooks and
Economic Modelling, 2012, vol. 29, issue 6, 2651-2663
We employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.
Keywords: Forward curves; Inventory; Commodity price volatility; Theory of storage; Convenience yield (search for similar items in EconPapers)
JEL-codes: C22 C58 G00 G13 (search for similar items in EconPapers)
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Working Paper: Futures basis, inventory and commodity price volatility: An empirical analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2651-2663
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