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

Geman, Hélyette and Smith, William O. (2013) Theory of storage, inventory and volatility in the LME base metals. Resources Policy 38 (1), pp. 18-28. ISSN 0301-4207.

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Official URL: http://dx.doi.org/10.1016/j.resourpol.2012.06.014

Abstract

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 predictions 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. Including Chinese inventories reported by the Shanghai Futures Exchange 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.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work submitted for publication in Resources Policy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version will be published in RESOURCES POLICY, [VOL#, ISSUE#, (DATE)] DOI# TBC
Keyword(s) / Subject(s): Working curve, storage, base metals, inventory, volatility, convenience yield, futures curve
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Mr William O Smith
Date Deposited: 05 Jul 2012 07:30
Last Modified: 17 Apr 2013 12:33
URI: http://eprints.bbk.ac.uk/id/eprint/4891

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