Futures Basis, Inventory and Commodity Price Volatility: An Empirical Analysis

L. Symeonidis, M. Prokopczuk, C. Brooks, E. Lazar

Research output: Contribution to journalArticle

35 Citations (Scopus)

Abstract

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993-2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze 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.
Original languageEnglish
Pages (from-to)2651-2663
Number of pages13
JournalEconomic Modelling
Volume29
Issue number6
DOIs
Publication statusPublished - 1 Nov 2012

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