The present value model of rational commodity pricing
Name
28596165.pdf
Size
1.94 MB
Format
Adobe PDF
Checksum (MD5)
50b0ae1b7e3228e257274944f2a2a5a2
Author(s)
Pindyck, Robert S.
Date Issued
1991
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
Working paper (Massachusetts Institute of Technology. Center for Energy Policy Research) ; MIT-CEPR 91-008.
Abstract
The present value model says that an asset's price equals the sum of current and future discounted expected future payoffs from ownership of the asset. I explore the limits of the present value 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 future prices. The present value model imposes restrictions on the joint dynamics of spot and future prices, which I test for four commodities. I find a close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same when one looks at the serial dependence of excess returns. These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.
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