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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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    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: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Research Centres and Institutes: Commodities Finance Centre
    Depositing User: Mr William O Smith
    Date Deposited: 05 Jul 2012 07:30
    Last Modified: 02 Aug 2023 16:57


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