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Modelling and Measuring Price Discovery in Commodity Markets

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dc.affiliation.dptoUC3M. Departamento de Economía de la Empresaes
dc.contributor.authorFiguerola-Ferretti, Isabel
dc.contributor.authorGonzalo, Jesús
dc.contributor.editorUniversidad Carlos III de Madrid. Departamento de Economía de la Empresa
dc.date.accessioned2012-11-27T16:14:20Z
dc.date.available2012-11-27T16:14:20Z
dc.date.issued2008
dc.description.abstractIn this paper we present an equilibrium model of commodity spot (st) and futures (ƒt) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modelling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-futures equilibrium relationship, st = β2ƒt + β3 When the slope of the cointegrating vector β2 > 1(β2 < 1) the market is under long run backwardation (contango). It is the first time in this literature in which the theoretical possibility of finding a cointegrating vector different from the standard β2 = 1 is formally considered. Independent of the value of β2 this paper shows that the equilibrium model admits an economically meaningful Error Correction Representation, where the linear combination of (st) and (ƒt) characterizing the price discovery process in the framework of Garbade and Silber (1983). coincides exactly with the permanent component of the Gonzalo and Granger (1995) Permanent Transitory decomposition. This linear combination depends on the elasticity of arbitrage seIVices and is determined by the relative liquidity traded in the spot and futures markets. Such outcome not only provides a theoretical justification for this Permanent-Transitory decomposition; but it offers a simple way of detecting which of the two prices is dominant in the price discovery process. All the results are testable. as can be seen in the application to spot and futures non-ferrous metals prices (Al, Co, Ni, Pb, Zn) traded in the London Metal Exchange (LME). Most markets are in backwardation and futures prices are "information dominant" in highly liquid futures markets (Al, Cu, Ni, Zn).
dc.format.mimetypeapplication/pdf
dc.identifier.urihttps://hdl.handle.net/10016/15951
dc.language.isoeng
dc.relation.hasversionhttp://hdl.handle.net/10016/15910
dc.relation.ispartofseriesUC3M Working papers. Business Economics
dc.relation.isversionofhttp://hdl.handle.net/10016/758
dc.rights.accessRightsopen access
dc.subject.ecienciaEmpresa
dc.subject.jelC32
dc.subject.jelC51
dc.subject.jelG13
dc.subject.jelG14
dc.subject.otherBackwardation
dc.subject.otherCointegration
dc.subject.otherCommodity markets
dc.subject.otherContango
dc.subject.otherConvenience yield
dc.subject.otherFutures prices
dc.subject.otherPermanent-Transitory decomposition
dc.subject.otherPrice discovery
dc.titleModelling and Measuring Price Discovery in Commodity Markets
dc.typeworking paper*
dc.type.hasVersionSMUR*
dspace.entity.typePublication
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