Futures Basis, Inventory and Commodity Price Volatility: An Empirical Analysis
36 Pages Posted: 25 Oct 2011 Last revised: 2 Jan 2013
Date Written: May 6, 2012
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 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.
Keywords: Forward curves, scarcity, commodity price volatility, theory of storage, convenience yield
JEL Classification: C22, C58, G00, G13
Suggested Citation: Suggested Citation