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Futures basis, inventory and commodity price volatility: An empirical analysis

Lazaros Symeonidis (), Marcel Prokopczuk (), Chris Brooks and Emese Lazar

MPRA Paper from University Library of Munich, Germany

Abstract: We employ a large dataset of physical inventory data on 21 different commodities for the period 1993-2011 to empirically analyze the behaviour of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we explore 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 period.

Keywords: Forward curves; inventory; commodity price volatility; theory of storage; convenience yield (search for similar items in EconPapers)
JEL-codes: C59 C22 G00 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr
Date: 2012-07-04
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Journal Article: Futures basis, inventory and commodity price volatility: An empirical analysis (2012) Downloads
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