Pricing of non-ferrous metals futures on the London Metal Exchange

Watkins, Clinton; McAleer, Michael

doi:10.1080/09603100600756514

Cited by 46 publications

(20 citation statements)

References 37 publications

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“…The existence of feedback‐effects between spot and futures prices has been extensively studied in the extant literature, as documented by the survey article by Chow, McAleer, and Sequeira (). More recent contributions in the area are Brooks, Rew, and Ritson (), Pindyck (), Heaney (, , ), Watkins and McAleer (), Tilton, Humphreys, and Radetzki (), Stepanek, Walter, and Rathgeber (), and Gulley and Tilton (), among others…”

Section: Introductionmentioning

confidence: 99%

Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

Fernández

2015

Journal of Futures Markets

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Recent research has concluded that spot and futures copper returns are more closely correlated during periods of contango than of backwardation. It is argued speculation and investor demand in futures markets should affect spot prices to a much lesser extent during backwardation, due to an infeasible inter‐temporal arbitrage. This article expands this line of research by analyzing daily spot and 3‐, 15‐, and 27‐month futures contract prices for industrial metals traded on the London Metal Exchange over a period of more than two decades. Estimates of convenience yields are provided, along with tests for Granger causality between futures and spot returns after accounting for cointegration, and tests for statistical differences between correlations of contemporaneous spot and futures returns during periods of contango and backwardation. After various robustness checks, the evidence supporting a stronger linkage between spot and futures markets in contango is weak. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:375–396, 2016

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Section: Introductionmentioning

confidence: 99%

Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

Fernández

2015

Journal of Futures Markets

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“…However, in the special case of the Scandinavian Nordpool electricity market, unusual because a large proportion of its electricity is generated from hydroelectric dams, water stored in the dams serves as an inventory of electricity (Botterud, Kristiansen, and Ilic 2010). Watkins and McAleer (2006) examine the LME base metals in an econometric sense, and find limited support for a 'cost of carry' which is based on convenience yield and hence related to the theory of storage.…”

Section: Effect)mentioning

confidence: 99%

Theory of storage, inventory and volatility in the LME base metals

Geman

Smith

2013

Resources Policy

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The theory of storage, as related to commodities, makes two predictions involving the quantity of the commodity held in inventory. When inventory is low (i.e. a situation of scarcity), spot prices will exceed futures prices, and spot price volatility will exceed futures price volatility.Conversely, during periods of no scarcity, both spot prices and spot price volatility will remain relatively subdued. We test these relationships for the six base metals traded on the London Metal Exchange (aluminium, copper, lead, nickel, tin and zinc), and find strong validation for the theory.Moreover, and in contrast to widespread claims that Chinese inventory data are opaque, we find that including Chinese inventories strengthens the relationship further. We also introduce the concepts of excess volatility, inventory-implied spot price and inventory-implied spot volatility and illustrate some applications.

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“…The price difference is a risk premium, which speculators charge for bearing the price risk. However, despite the usefulness of this theory for several commodities, many studies cast doubts on the validity of this interpretation of the futures price for industrial metals (Chowdhury, 1991;Watkins and McAleer, 2006;Otto, 2011). Hence, we focus on the theory of storage in the following text.…”

Section: Commodity Futures and Convenience Yieldsmentioning

confidence: 97%

Is the convenience yield a good indicator of a commodity's supply risk?

2013

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a b s t r a c tA strong increase in the demand for some commodities over the last decade will have a major impact on their future supply situation. Of increasing importance, therefore, is an assessment of a commodity's criticality, and especially its supply risk, by appropriate indicators. The literature has proposed numerous indicators of the supply risk. Here, we use the convenience yield of commodity futures as a supply risk indicator to address some of the major shortcomings of existing indicators, especially regarding their predictive power. This paper aims to test the applicability of the convenience yield as an indicator of a commodity's future supply risk. Therefore, we calculate historical convenience yields for 3-, 15-, and 27-month futures contracts for five major industrial metals (aluminum, copper, lead, nickel, and zinc) during the period 1999 to 2011. We compare the convenience yields at the beginning of the contract period to known indicators at maturity to find that the convenience yield has generally predictive power for the static stock lifetime (i.e., inventory volume/turnover) and future spot prices. Furthermore, we find that, with some restrictions, the convenience yield is an applicable indicator of a commodity's supply risk.

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Pricing of non-ferrous metals futures on the London Metal Exchange

Cited by 46 publications

References 37 publications

Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

Theory of storage, inventory and volatility in the LME base metals

Is the convenience yield a good indicator of a commodity's supply risk?

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