The Present Value Model of Rational Commodity Pricing

Robert Pindyck

No 4083, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The present value model relates an asset's price to the sum of its discounted expected future payoffs. I explore the limits of the model by testing its ability to explain the pricing of storable commodities. For commodities the payoff stream is the convenience yield that accrues from holding inventories, and it can be measured directly from spot and futures prices. Hence the model imposes restrictions on the joint dynamics of spot and futures prices, which I test for four commodities. I find close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same for the serial dependence of excess returns, These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.

Date: 1992-05
Note: AP
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Citations: View citations in EconPapers (25)

Published as The Economic Journal, Vol. 103, No. 418, pp. 511-530 (May 1993).

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Journal Article: The Present Value Model of Rational Commodity Pricing (1993)
Working Paper: The present value model of rational commodity pricing (1991)
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