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Pricing LME Commodity Futures Contracts

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  • Richard Heaney

Abstract

It is generally argued that there is a link between commodity prices and stock levels and this paper provides a test of two economic models that attempt to explain commodity pricing, the stock-out model with two separate pricing states and the convenience yield model. Global stock levels are collected and interest-adjusted basis is calculated for the LME commodities, copper, lead and zinc spanning the period November 1964 to December 2003. A two-regime Markov model with an added stock variable appears to fit the data reasonably well, providing evidence supporting the existence of two separate commodity pricing regimes and the existence of a convenience yield effect that is inversely related to the level of stocks on hand.

Suggested Citation

  • Richard Heaney, 2004. "Pricing LME Commodity Futures Contracts," Econometric Society 2004 Australasian Meetings 172, Econometric Society.
    • Handle: RePEc:ecm:ausm04:172
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    More about this item

    Keywords

    convenience yield; stockout; futures contracts; copper; lead; zinc;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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