On inverse carrying charges and spatial arbitrage

Donald Larson ()

Journal of Futures Markets, 2007, vol. 27, issue 4, 305-336

Abstract: A dynamic trader problem under uncertain demand is presented and spatial and temporal arbitrage conditions derived from first‐order conditions. A time‐varying storage premium that explains backwardation and inverse carrying charges independent of risk‐aversion, stockouts, or convenience is developed. Random‐returns and cost‐of‐carry models are expressed as special conditions of the derived model. An applied composite‐error model is estimated using data from the London Metal Exchange's copper contract. Predictions of the model are tested against well‐known alternatives. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:305–336, 2007

Date: 2007
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