Using a Zero-Non-Zero Patterned Error-Correction Model to Examine the Process of Price Formation in Metals Markets

21 Pages Posted: 26 Oct 2001

See all articles by Jack H.W. Penm

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

Jammie H. Penm

Independent

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Abstract

In this paper recent advances in zero-non-zero patterned vector error correction modelling (VECM) have been utilised to test two hypotheses which are important for price formation in the world metal markets. The first hypothesis is the existence of a long-term relationship between metal production and consumption. We have found conclusive support for this hypothesis across a range of metals, including aluminum, copper, nickel, zinc and lead, and this relationship is significant in explaining the price formation processes for metals. The second hypothesis relates to the long-term relationship between metal consumption and general economic activity. Strong support for this long-term relationship is found, although its effects on the price formation appear to be mostly indirect. Another factor which is important for metal price formation is the change in general economic activity. In most cases it contributes significantly to the movements in metal prices.

Keywords: ZNZ patterned vector error-correction modelling, Cointegration, Metals markets, General economic activity, Price formation

JEL Classification: C10, C63, G10

Suggested Citation

Penm, Jack and Penm, Jammie H. and Terrell, R. Deane, Using a Zero-Non-Zero Patterned Error-Correction Model to Examine the Process of Price Formation in Metals Markets. Available at SSRN: https://ssrn.com/abstract=287180 or http://dx.doi.org/10.2139/ssrn.287180

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

Jammie H. Penm

Independent ( email )

61 (02) 62880126 (Phone)
61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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