RT Generic
T1 Modelling and measuring price discovery in commodity markets
A1 Figuerola-Ferretti, Isabel
A1 Gonzalo, Jesús
A2 Universidad Carlos III de Madrid. Departamento de Economía de la Empresa, 
AB In this paper we present an equilibrium model of commodity spot (St) and future (Ft) prices,with finite elasticity of arbitrage services and convenience yields. By explicitlyincorporating and modeling endogenously the convenience yield, our theoretical model isable to capture the existence of backwardation or contango in the long-runspot-futureequilibrium relationship, (St-ß2Ft). When the slope of the cointegrating vector ß2>1(ß2<1) the market is under long-run backwardation (contango). It is the first time in whichthe theoretical possibility of finding a cointegrating vector different from the standardß2=1 is formally considered.Independent of the value of ß2, this paper shows that the equilibrium model admits anError Correction Representation, where the linear combination of (St) and (Ft)characterizing the price discovery process, coincides with the permanent component of theGonzalo-Granger(1995) Permanent-Transitorydecomposition. This linear combinationdepends on the elasticity of arbitrage services and is determined by the relative liquiditytraded in the spot and future markets. Such outcome not only provides a theoreticaljustification for this Permanent-Transitorydecomposition? but it offers a simple way ofdetecting which of the two prices is dominant in the price discovery process.All the results produced in this article are testable, as it can be seen in the application tospot and future non-ferrousmetals prices (Al, Cu, Ni, Pb, Zn) traded in the London MetalExchange (LME). Most markets are in backwardation and future prices are ?informationdominant? in the most liquid future markets (Al, Cu, Ni, Zn).
YR 2007
FD 2007-05
LK https://hdl.handle.net/10016/758
UL https://hdl.handle.net/10016/758
LA eng
LA eng
DS e-Archivo
RD 27 jul. 2024