Volatility and commodity price dynamics

Robert Pindyck

Journal of Futures Markets, 2004, vol. 24, issue 11, 1029-1047

Abstract: Commodity prices are volatile, and volatility itself varies over time. Changes in volatility can affect market variables by directly affecting the marginal value of storage, and by affecting a component of the total marginal cost of production, the opportunity cost of producing the commodity now rather than waiting for more price information. I examine the role of volatility in short‐run commodity market dynamics and the determinants of volatility itself. I develop a structural model of inventories, spot, and futures prices that explicitly accounts for volatility, and estimate it using daily and weekly data for the petroleum complex: crude oil, heating oil, and gasoline. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1029–1047, 2004

Date: 2004
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