Business Cycles and the Behavior of Metals Prices

Authors

  • EUGENE F. FAMA,

  • KENNETH R. FRENCH

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    • Both authors from Graduate School of Business, University of Chicago. The comments of M. Hartzmark, a referee, and workshop participants at the University of Chicago, the University of Michigan, and the University of Utah are gratefully acknowledged. This research is supported by the National Science Foundation (Fama) and the Center for Research in Security Prices (French).

ABSTRACT

The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of “normal” futures-spot price relations around business-cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions.

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