Working Paper: NBER ID: w4083
Authors: Robert S. Pindyck
Abstract: The present value model relates an asset's price to the sum of its discounted expected future payoffs. I explore the limits of the model by testing its ability to explain the pricing of storable commodities. For commodities the payoff stream is the convenience yield that accrues from holding inventories, and it can be measured directly from spot and futures prices. Hence the model imposes restrictions on the joint dynamics of spot and futures prices, which I test for four commodities. I find close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same for the serial dependence of excess returns, These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.
Keywords: commodity pricing; present value model; convenience yield; futures markets
JEL Codes: D81; G12; Q11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| commodity prices (Q02) | expected future convenience yields (D15) |
| expected future convenience yields (D15) | commodity prices (Q02) |
| spot price and futures prices (G13) | cointegration (C10) |
| deviations from model's predictions (C52) | market inefficiencies for gold (G14) |
| heating oil prices (Q31) | present value model (G19) |
| copper and lumber prices (L73) | model alignment (C52) |
| gold prices (G13) | speculative factors (D84) |