How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock

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Price:  $18.00

Author/Editor: Nese Erbil, Shaun K Roache
Release Date: © September, 2010
ISBN : 978-1-45520-887-6
Stock #: WPIEA2010222
Stock Status: On back-order

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How does a commodity market adjust to a temporary scarcity shock which causes a shift in the slope of the futures price curve? We find long-run relationships between spot and futures prices, inventories and interest rates, which means that such shocks lead to an adjustment back towards a stable equilibrium. We find evidence that the adjustment is somewhat consistent with well-known theoretical models, such as Pindyck (2001); in other words, spot prices rise and then fall, while inventories are used to absorb the shock. Importantly, the pace and nature of the adjustment depends upon whether inventories were initially high or low, which introduces significant nonlinearities into the adjustment process.


Capital markets , Financial institutions and markets

More publications in this series: Working Papers

More publications by: Nese Erbil ; Shaun K Roache