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

36 Pages Posted: 25 Oct 2011 Last revised: 2 Jan 2013

See all articles by Lazaros Symeonidis

Lazaros Symeonidis

University of East Anglia (UEA) - Norwich Business School

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chris Brooks

University of Reading - ICMA Centre

Emese Lazar

University of Reading - ICMA Centre

Date Written: May 6, 2012

Abstract

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

Symeonidis, Lazaros and Prokopczuk, Marcel and Brooks, Chris and Lazar, Emese, Futures Basis, Inventory and Commodity Price Volatility: An Empirical Analysis (May 6, 2012). Economic Modelling, Vol. 29, No. 6, 2012. Available at SSRN: https://ssrn.com/abstract=1949097 or http://dx.doi.org/10.2139/ssrn.1949097

Lazaros Symeonidis

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Emese Lazar

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 (0)1183 786675 (Phone)
+44 (0)1189 314741 (Fax)

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