Is the Convenience Yield a Good Indicator for a Commodity’s Criticality?

27 Pages Posted: 5 Nov 2012

See all articles by Christian Stepanek

Christian Stepanek

University of Augsburg

Matthias Walter

affiliation not provided to SSRN

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

Date Written: June 6, 2012

Abstract

For some commodities, the strong increase in demand over the last decade will have major impact on their future availability. Thus, the importance of assessing a commodity’s criticality by means of criticality indicators continuously increases. In the literature, numerous indicators for criticality are proposed (e.g., spot prices, the Herfindhal-Hirschmann Index, etc.). In order to address some of the major shortcomings of these existing indicators, especially regarding their predictive power, we propose to use the convenience yield of commodity futures as criticality indicator.

In the paper we aimed to test the applicability of the convenience yield as indicator for a commodity’s future criticality. Therefore we used historical convenience yields from 3, 15, and 27 months futures contracts for five major industrial metals. We compared the convenience yields at the beginning of the contracts with known criticality indicators until the time of maturity. We found evidence that the convenience yield in general has predictive power on the static stock lifetime (i.e. inventory volume / turnover) and future spot prices. Furthermore we show evidence that with some restrictions the convenience yield suits to be an applicable indicator for a commodity’s criticality.

Keywords: Convenience Yield, Theory of Storage, Commodities, Criticality, Scarcity

Suggested Citation

Stepanek, Christian and Walter, Matthias and Rathgeber, Andreas, Is the Convenience Yield a Good Indicator for a Commodity’s Criticality? (June 6, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2084924 or http://dx.doi.org/10.2139/ssrn.2084924

Christian Stepanek (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Matthias Walter

affiliation not provided to SSRN ( email )

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

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