Forward pricing and efficiency in the silver market

If futures prices ‘fully reflect’ all available information, then these prices may be interpreted as market anticipations of spot (cash) prices at the delivery date of the futures contract. This hypothesis, which has tended to find most support among established markets for storable commodities, is investigated for the Chicago silver futures market. Using instrumental variable estimation and a joint (χ²) test, the unbiased prediction hypothesis is rejected, and a tentative explanation is offered for this outcome. This result, however, does not necessarily imply that the market is inefficient, and two tests of the weak form efficient markets hypothesis suggest that, while there is some slight dependence in past prices, this is only marginally more than would be expected from normal sampling variation.     

Investor demand and spot commodity prices

The on-going debate over the influence of investor demand on spot commodity prices largely attempts to assess this influence by measuring the growth in investor demand in recent years. Given the serious data problems that plague such analyses, this article pursues another approach in the hope of providing useful insights into the impact of investor demand on spot commodity prices. It focuses on the mechanisms by which investor demand affects spot prices, and in particular on two questions. First, how does an increase in investor demand on the futures markets affect the spot market and spot price? Second, when investor demand is increasing and pushing a commodity's price up, do physical stocks of the commodity also have to be rising, as economists and others widely assume?On the first question, the article concludes that a surge in investor demand raising prices on the futures markets will have a direct and comparable effect on the spot market prices when these markets are in strong contango. However, when markets are in weak contango or backwardation, price movements in the futures markets have a much looser effect on spot prices. As a result, changes in investor demand on the futures markets may have little or no influence on spot prices in the absence of a strong contango. Instead, changes in fundamentals (that is, producer supply and consumer demand) and possibly changes in investor demand taking place directly on the spot market largely determine the spot price at such times.On the second question, the article shows that investor demand can be pushing up a commodity's price even when investor stocks are falling, despite the widespread presumption to the contrary.     

Derivative mine valuation: strategic investment decisions in competitive markets

Successful management in competitive markets requires evaluation methods that respond to global market dynamics and provide investors with relevant information to make strategic investment decisions. These strategic decisions include decisions on investment timing, feasibility study and risk management and mine operating options. Conventional methods do not have the built-in capabilities to help investors handle these strategic issues. Advances in modern finance have had profound impacts on financial markets for options, futures and collaterized securities and offer appropriate tools in solving these problems. In this paper, the authors have extended the Brennan and Schwartz mineral resource model to develop the derivative mine valuation method based on the dynamic arbitrage theory. A copper mining venture has been evaluated using the derivative mine valuation and conventional methods. The results show that the derivative mine valuation method allows investors to maximize the venture's market value by exercising these strategic options.     

Testing the international linkage in the platinum-group metal futures markets

This study tests whether an international market exists in the platinum-group metal (PGM) futures markets. For this purpose, we tested the law of one price (LOP) and the causality between the U.S. and Japanese platinum and palladium futures markets. We also performed the test when structural breaks are considered. Long-run price relationships were found in both platinum and palladium markets but the LOP only sustained in the palladium market. The causality test revealed that it is the U.S. market that leads the price to transmit information between the U.S. and Japanese markets. Structural breaks had large impacts on the test results, suggesting that incorporating breaks is important when investigating the international price linkage in the PGM futures markets.     

The significance of futures trading in minerals and oil

Futures trading has been introduced for aluminium and oil in recent years and the range of contracts available on various minerals and oil products continues to widen. Concern has been expressed by producers of a number of minerals, including nickel and platinum, that the introduction of futures trading may introduce a speculative element to price determination that will create inappropriate or excessively volatile prices. It is the purpose of this article to analyse the role of futures trading in relation to trade in underlying commodities in general and especially for trade in minerals and oil. Evidence from oil and platinum markets, in particular, is adduced and examined in the light of earlier evidence of the influence of futures trading on underlying commodities. The contribution of futures trading is examined in detail and conclusions are reached on the significance of futures trading for minerals and oil.     

International commodity transactions : The role of the commodity futures trading commission

The creation of so-called ‘financial’ futures contracts in the USA has spurred the growth of futures trading by other countries, including the UK. The increased expansion of commodity futures trading has also led to heightened regulatory concerns throughout the world. The USA has been especially aggressive in asserting jurisdiction and establishing regulatory controls over persons dealing in the US markets. The complexity of the regulations adopted is compounded by the fact that they are often directed at specific instruments, while similar instruments are not given comparable regulatory treatment. This article discusses the growth of futures trading worldwide, as well as regulatory concerns and requirements existing in the USA.     

Long term contracts and market stability: The case of iron ore

The paper gives the background to the international iron ore trade and discusses the organization of markets and causes of instability. The role of the long term contract is then examined and possible relationships between prices and quantity instability and the pattern of use of long term contracts is considered. It is concluded that although such contracts tend to promote market stability this may conflict with the need for market readjustment.     

Commodity futures and market efficiency: A fractional integrated approach

In financial time series, persistence or inertia is a feature usually observable in absolute returns, i.e., a proxy for volatility. Moreover, asset return series should be essentially unpredictable according to the efficiency market hypothesis (EMH) in its weak form. Surprisingly, recent literature has found evidence of anti-persistence in technology stocks and commodity futures returns. Anti-persistence would be indicative of an overreaction of asset prices to incoming information.     

Would commodity market stabilization agreements redistribute economic resources to developing countries?: The case of copper

There has been strong pressure, particularly within UNCTAD, for international stabilization agreements for the major commodity markets, in order to stabilize prices and to redistribute resources towards the developing country producers. However, no empirical evidence on the feasibility or desirability of these proposals has appeared. As an illustration of the possibilities, this paper makes estimates of the stabilizing power and costs of buffer stock interventions in the world copper market. We find that price and revenue stabilization is technically possible; but that to generate income transfers to the developing countries is prohibitively expensive and creates a further problem of redistribution among developing country producers.     

NORMALIZED AGRICULTURAL PRICES AND WATER RESOURCES PLANNING1

ABSTRACT: Short-term fluctuations in agricultural markets necesitate adjustments in market prices for use in water resources planning. Two procudures for this price normalizing are described and evaluated. The linear treand and weighted average normalizing procedures perform reasonably well, except in cases of dramatic price oscillations.     

Forecasting precious metal price movements using trader positions

In the early 2000s, the precious metal markets entered into a new phase where a steady rise of prices had been observed until the October 2008 crash. Given the size and importance of precious metal market, as well as the hedging capacity of precious metals due to their low correlation with equity markets (Draper et al., 2006), the question we want to arise is whether trader positions predict the direction of gold, platinum, and silver spot price movements. The forecasting content of the Commodity Futures Trading Commission’s Commitment of Traders report for platinum, silver and gold prices using trader positions is investigated in a VAR framework. Granger causality tests are conducted to determine whether a relation between trader positions and market prices exists. An examination of the extreme trader positions on price movements is also conducted. The results indicate that market return is a significant parameter in explaining trader’s positions for all trader types in each of the precious metal markets under consideration after the beginning of 2000s where we detect a structural break for each of the market under study. Commercial traders are found to be negative feedback traders, that is, they sell when the prices increase in the market. On the other hand, in line with the previous literature, a positive correlation between returns and positions held by non-commercial and non-reporting traders is found. However, trader’s net positions do not lead market returns in general. There is some evidence on the forecasting ability of extreme trader positions on market returns.     

Price and volatility transmission between primary and scrap metal markets

The relationship between primary and scrap prices has been hypothesized for the most part as unidirectional, characterized by spillovers from primary to scrap prices. The purpose of this study is to evaluate empirically the dynamic interactions between primary and scrap metal prices through multivariate time series methods. In addition, the study expands the investigation at the level of volatility transmission, which has not been previously examined. The metal prices utilized are for copper, lead, and zinc for the period 1984–2001. The paper demonstrates differing long run and short run links. Scrap prices do not improve the long run interpretation of primary prices, but information flows from the scrap to the primary markets exist in the short run. Additionally, the copper and lead markets exhibit bidirectional information flows in terms of volatility transmission. The analysis provides valuable insight into the interactions of the primary and scrap metal sectors which can be used to improve forecasting and planning.     

Future markets: An alternative for stabilizing secondary materials markets?

The authors present an economic justification for extramarket intervention in the markets for secondary materials and briefly discuss the possible impacts of futures trading on the cash market for a commodity. These impacts are applied to the markets for secondary materials and the potential effects are assessed. They conclude with a rationale for public participation in initiating a scrap futures market.     

Scrap tires to crumb rubber: feasibility analysis for processing facilities

Crumb rubber can be produced from scrap tires in a wide range of particle sizes and quality levels. Ideally, the revenue stream includes tipping fees paid to receive the raw materials; sales of variously-sized crumb products to different end-user markets; and potential sales of scrap metal and fiber contained within the tires. General demand has been increasing, and submarkets for crumb products are growing in size and variety. However, the optimistic expectations of potential investors and government agencies contrast sharply with the experiences of many current and former producers. Production planning and operation is complex, real-dollar crumb prices have fallen, and many producers recount difficulties finding stable markets and competing against newer, state-subsidized competitors. This paper examines the engineering economics of crumb rubber facilities. Following a literature review and interviews with producers, a financial model of a nominal processing operation was created to aid the analysis of different market, crumb size, and production scenarios. The profitability of a crumb facility appears to be particularly sensitive to crumb rubber prices, operating costs, and raw material availability. Better analysis of market and production impacts on financial viability for proposed processing facilities would aid overall market efficiency.     

Price and volatility transmission between primary and scrap metal markets

The relationship between primary and scrap prices has been hypothesized for the most part as unidirectional, characterized by spillovers from primary to scrap prices. The purpose of this study is to evaluate empirically the dynamic interactions between primary and scrap metal prices through multivariate time series methods. In addition, the study expands the investigation at the level of volatility transmission, which has not been previously examined. The metal prices utilized are for copper, lead, and zinc for the period 1984–2001. The paper demonstrates differing long run and short run links. Scrap prices do not improve the long run interpretation of primary prices, but information flows from the scrap to the primary markets exist in the short run. Additionally, the copper and lead markets exhibit bidirectional information flows in terms of volatility transmission. The analysis provides valuable insight into the interactions of the primary and scrap metal sectors which can be used to improve forecasting and planning.     

THE STRUCTURE AND PRACTICE OF WATER QUALITY TRADING MARKETS1

ABSTRACT: The use of transferable discharge permits in water pollution, what we will call water quality trading (WQT), is rapidly growing in the U.S. This paper reviews the current status of WQT nationally and discusses the structures of the markets that have been formed. Four main structures are observed in such markets: exchanges, bilateral negotiations, clearinghouses, and sole source offsets. The goals of a WQT program are environmental quality and cost effectiveness. In designing a WQT market, policy makers are constrained by legal restrictions and the physical characteristics of the pollution problem. The choices that must be made include how trading will be authorized, monitored and enforced. How these questions are answered will help determine both the extent to which these goals are achieved, and the market structures that can arise. After discussing the characteristics of different market structures, we evaluate how this framework applies in the case of California's Grassland Drainage Area Tradable Loads Program.     

Market imperfections in recycling markets: conceptual issues and empirical study of price volatility in plastics

The effectiveness of recycling depends upon efficient functioning of secondary material markets. This paper focus on the role that price volatility can play in slowing investment and market development. However, a statistical analysis of the relative volatility of secondary and primary material prices does not confirm the widely-held belief that relative price volatility is higher in secondary than in primary materials, at least at national levels.An econometric estimation of the determinants of plastic recovery volumes in Seattle contributes to the literature in four ways: the use of monthly (as opposed to annual) data; the use of local (as opposed to national) data; the use of an explanatory variable to reflect price volatility; and, the focus on plastics, which have not been examined previously. Some tentative conclusions can be made: the results generally support the principal hypothesis that price volatility has a negative effect on recovery of secondary materials; in addition, and consistent with previous studies, price elasticities are low and insignificant; and finally, policy factors are clearly important. The concluding section treats the economic and policy implications of market inefficiency in secondary material markets.     

Futures markets and economic efficiency: A theoretical perspective

This article examines the role of futures markets in schieving economic efficiency. The question is introduced in a timeless, certain framework, and extended to the case where time, but not uncertainty, becomes important: it is shown that in such a framework futures markets ensure economic efficiency. Uncertainty is then introduced, and it is shown that contingent markets ensure full efficiency, but that these are cumbersome; it is also shown that futures markets, as an alternative, ensure approximate efficiency. An appendix explores more formally the relation between markets and efficiency.     

Are metals markets efficient?

An efficient market is one in which all relevant information is reflected in prices. Market efficiency can be weak, semistrong or strong; in the last state metals markets will properly reflect supply and demand. There are many methodological difficulties in assessing metals markets' efficiency, and the current state of research indicates variability across different metals and different time periods.     

Composite market design for a Transferable Discharge Permit (TDP) system

There has been a great deal of interest in addressing water quality issues through the use of Transferable Discharge Permit (TDP) systems. Unfortunately, the attempts to start up permit markets that are able to exploit abatement cost differences between sources have not met with the success expected. Two of the reasons for the lack of success have been the problem of transaction costs and in the case of non-point sources (NPS), undefined property rights. The composite market design is a proposal for a TDP system that specifically includes agricultural non-point source (NPS) discharges and addresses both property rights and transaction cost problems. The composite market consists of three interrelated markets each serving a particular function. The two primary markets are coordinated through price information that makes it possible for a catchment-based authority to issue (sell) permits based on the marginal cost of abatement. When the composite market is mature, the total number of permits issued corresponds to a cap on discharges allowed in the catchment. The structure of the composite market allows this system to be phased in over time with existing institutions and limited demands on financing.