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An Empirical Analysis of Commodity Convenience Yields

Author

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  • Cantekin Dincerler

    (The Energy Practice, McKinsey & Company, Two Houston Center, 909 Fannin, Suite 3500, Houston, Texas 77010, USA)

  • Zeigham Khokher

    (Freeman School of Business, Tulane University, 7 McAllister Drive, New Orleans LA, 70118, USA)

  • Timothy Simin

    (Smeal School of Business, The Pennsylvania State University, 609 Business Administration Building, University Park, PA 16802, USA)

Abstract

We study convenience yield dynamics using a dataset of inventories to proxy for relative scarcity. We confirm that convenience yields are negatively related to inventories although they plateau during periods of scarcity for crude oil. Inventory withdrawals are non-monotonically related to the convenience yield and they forecast significant futures returns. Testing for the effect of demand shocks, we document both temporary and permanent price components. Importantly, we show that mean reversion in expected equilibrium prices varies with relative scarcity. This result suggests an important bias in contingent claims models in extant practice.

Suggested Citation

  • Cantekin Dincerler & Zeigham Khokher & Timothy Simin, 2020. "An Empirical Analysis of Commodity Convenience Yields," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-27, June.
    • Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:02:n:s2010139220500093
    DOI: 10.1142/S2010139220500093
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    Citations

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    Cited by:

    1. Zaremba, Adam & Bianchi, Robert J. & Mikutowski, Mateusz, 2021. "Long-run reversal in commodity returns: Insights from seven centuries of evidence," Journal of Banking & Finance, Elsevier, vol. 133(C).
    2. Christiane Baumeister, 2021. "Measuring Market Expectations," Working Papers 202163, University of Pretoria, Department of Economics.
    3. Makkonen, Adam & Vallström, Daniel & Uddin, Gazi Salah & Rahman, Md Lutfur & Haddad, Michel Ferreira Cardia, 2021. "The effect of temperature anomaly and macroeconomic fundamentals on agricultural commodity futures returns," Energy Economics, Elsevier, vol. 100(C).
    4. Alibeiki, Hedayat & Lotfaliei, Babak, 2022. "To expand and to abandon: Real options under asset variance risk premium," European Journal of Operational Research, Elsevier, vol. 300(2), pages 771-787.
    5. Maryam Movahedifar & Hossein Hassani & Masoud Yarmohammadi & Mahdi Kalantari & Rangan Gupta, 2021. "A robust approach for outlier imputation: Singular Spectrum Decomposition," Working Papers 202164, University of Pretoria, Department of Economics.
    6. Loïc Maréchal, 2023. "A tale of two premiums revisited," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 580-614, May.

    More about this item

    Keywords

    Commodity pricing; theory of storage;

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