The joint dynamics of spot and futures commodity prices

by Ivar Ekeland, Edouard Jaeck, Delphine Lautier & Bertrand Villeneuve

We model the dynamic behavior of spot and futures commodity prices with an infinite horizon rational expectations equilibrium model. A new type of proof of existence of the equilibrium is provided. Using simulations with minimal changes between scenarios, we explore the specific effects of market structure, autocorrelation of production, and global risk aversion. The market structure can change a virtually nonstorable commodity into a high-inventory one. A high autocorrelation soften the apparent effects of storage in the short run. Global risk aversion typically decreases when financialization is developed. The effects on the joint price dynamics, risk sharing and physical choices are explored.

Keywords: Commodities; Futures Prices; Risk Premium; Speculation; Rational Expectations; Infinite Horizon.

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