Pricing of Non-ferrous Metals Futures on the London Metal Exchange

Clinton Watkins and Michael McAleer

No CIRJE-F-213, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: The London Metal Exchange (LME) is the most important centre for spot and futures trading in the main industrially-used non-ferrous metals. In this paper, data on 3-month futures contracts for aluminium, aluminium alloy, copper, lead, nickel, tin and zinc are analysed. The risk premium hypothesis and the cost-of-carry model are the standard theoretical models for pricing futures contracts, but these two models have rarely been estimated within a unified framework for metals futures. Single equation versions of the risk premium hypothesis and the cost-of-carry model are nested within a more general model. If the spot price, futures price, interest rate and stock level variables contain stochastic trends, long run versions of the general model can be estimated within a cointegration framework. Various long run pricing models are estimated using daily LME price data for the period 1 February 1986 to 30 September 1998. Likelihood ratio tests are used to test restrictions on the general model to examine the validity of alternative nested specifications.

Pages: 52 pages
Date: 2003-03
New Economics Papers: this item is included in nep-eec and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Pricing of non-ferrous metals futures on the London Metal Exchange (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2003cf213

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