Prices and production cost in aluminium smelting in the short and the long run

The main objective of this work is to reflect the structural changes that have characterized the aluminium industry over the last few decades. I order to capture the changes in competition I have estimated cost and related it to output prices by illustrating the effect of the prevalent industry risk sharing agreements. I argue that, contrary to what the microeconomic paradigm envisages, in the short run prices mainly determine costs as the consequence of a an exchange pricing system involving contractual risk-sharing arrangements. Costs determine prices only in the long run through investment in new smelting capacity. Previous studies of the aluminium industry had often used unreliable measures of weighted average variable cost. The main contribution of this work lies on the estimation of cost applying the flexible translog framework to a unique set of proprietary data

Prices and Production Cost in Aluminium Smelting in the Short and the Long run

The main objective of this work is to reflect the structural changes that have characterized the aluminium industry over the last few decades. I order to capture the changes in competition I have estimated cost and related it to output prices by illustrating the effect of the prevalent industry risk sharing agreements. I argue that, contrary to what the microeconomic paradigm envisages, in the short run prices mainly determine costs as the consequence of a an exchange pricing system involving contractual risk-sharing arrangements. Costs determine prices only in the long run through investment in new smelting capacity. Previous studies of the aluminium industry had often used unreliable measures of weighted average variable cost. The main contribution of this work lies on the estimation of cost applying the flexible translog framework to a unique set of proprietary data.

Modelling and measuring price discovery in commodity markets

In this paper we present an equilibrium model of commodity spot (St) and future (Ft) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modeling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-future equilibrium relationship, (St-ß2Ft ). When the slope of the cointegrating vector ß2>1 (ß2

Modelling and measuring price discovery in commodity markets.

In this paper we present an equilibrium model of commodity spot (St) and future (Ft) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modeling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-future equilibrium relationship, (St-ß2Ft ). When the slope of the cointegrating vector ß2>1 (ß2<1) the market is under long-run backwardation (contango). It is the first time in which the theoretical possibility of finding a cointegrating vector different from the standard ß2=1 is formally considered. Independent of the value of ß2, this paper shows that the equilibrium model admits an Error Correction Representation, where the linear combination of (St) and (Ft) characterizing the price discovery process, coincides with the permanent component of the Gonzalo-Granger (1995) Permanent-Transitory decomposition. This linear combination depends on the elasticity of arbitrage services and is determined by the relative liquidity traded in the spot and future markets. Such outcome not only provides a theoretical justification for this Permanent-Transitory decomposition? but it offers a simple way of detecting which of the two prices is dominant in the price discovery process. All the results produced in this article are testable, as it can be seen in the application to spot and future non-ferrous metals prices (Al, Cu, Ni, Pb, Zn) traded in the London Metal Exchange (LME). Most markets are in backwardation and future prices are ?information dominant? in the most liquid future markets (Al, Cu, Ni, Zn).Backwardation; Cointegration; Commodity markets; Contango; Convenience Yield; Future prices; Price discovery; Permanent-transitory decomposition;

Commonality in the LME aluminium and copper volatility processes through a Figarch lens

We consider dynamic representation of spot and three month aluminium and copper volatilities. These are the two most important metals traded in the London Metal Exchange (LME). They share common business cycle factors and are traded under identical contract specifications. We apply the bivariate FIGARCH model which allows parsimonious representation of long memory volatility processes. Our results show that spot and three month aluminium and copper volatilities follow long memory processes, that they exhibit a common degree of fractional integration and that the processes are symmetric. However, there is no evidence that the processes are fractionally cointegrated. This high degree of commonality may result from the common LME trading process

Price Variability and Marketing Method in the Non-Ferrous Metals Industry

We examine the impact of the pricing regime on price variability with reference to the non-ferrous metals industry. Theoretical arguments are ambiguous, but in any case suggests that the extent of monopoly power is more important than the pricing regime as determinant of variability. Slade (1991) argued that metals price volatility increased in the nineteen eighties relative to the seventies, and that this was associated with a move from administered producer pricing to exchange pricing. This claims are only partially supported. Extension of Slade's sample to the present indicates that any early differences between the variability of producer and exchange prices have now vanished.Metals, Futures trading, Exchange pricing, Producer pricing, Price volatility

Commonality in the LME aluminium and copper volatility processes through a Figarch lens

We consider dynamic representation of spot and three month aluminium and copper volatilities. These are the two most important metals traded in the London Metal Exchange (LME). They share common business cycle factors and are traded under identical contract specifications. We apply the bivariate FIGARCH model which allows parsimonious representation of long memory volatility processes. Our results show that spot and three month aluminium and copper volatilities follow long memory processes, that they exhibit a common degree of fractional integration and that the processes are symmetric. However, there is no evidence that the processes are fractionally cointegrated. This high degree of commonality may result from the common LME trading process.

Modelling and measuring price discovery in commodity markets

In this paper we present an equilibrium model of commodity spot (st) and futures (ƒt) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modelling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-futures equilibrium relationship, st = β2ƒt + β3 When the slope of the cointegrating vector β2 > 1(β2 < 1) the market is under long run backwardation (contango). It is the first time in this literature in which the theoretical possibility of finding a cointegrating vector different from the standard β2 = 1 is formally considered. Independent of the value of β2 this paper shows that the equilibrium model admits an economically meaningful Error Correction Representation, where the linear combination of (st) and (ƒt) characterizing the price discovery process in the framework of Garbade and Silber (1983). coincides exactly with the permanent component of the Gonzalo and Granger (1995) Permanent Transitory decomposition. This linear combination depends on the elasticity of arbitrage seIVices and is determined by the relative liquidity traded in the spot and futures markets. Such outcome not only provides a theoretical justification for this Permanent-Transitory decomposition; but it offers a simple way of detecting which of the two prices is dominant in the price discovery process. All the results are testable. as can be seen in the application to spot and futures non-ferrous metals prices (Al, Co, Ni, Pb, Zn) traded in the London Metal Exchange (LME). Most markets are in backwardation and futures prices are "information dominant" in highly liquid futures markets (Al, Cu, Ni, Zn).Publicad

Modelling and Measuring Price Discovery in Commodity Markets

In this paper we present an equilibrium model of commodity spot (st) and futures (ƒt) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modelling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the long-run spot-futures equilibrium relationship, st = β2ƒt + β3 When the slope of the cointegrating vector β2 > 1(β2 < 1) the market is under long run backwardation (contango). It is the first time in this literature in which the theoretical possibility of finding a cointegrating vector different from the standard β2 = 1 is formally considered. Independent of the value of β2 this paper shows that the equilibrium model admits an economically meaningful Error Correction Representation, where the linear combination of (st) and (ƒt) characterizing the price discovery process in the framework of Garbade and Silber (1983). coincides exactly with the permanent component of the Gonzalo and Granger (1995) Permanent Transitory decomposition. This linear combination depends on the elasticity of arbitrage seIVices and is determined by the relative liquidity traded in the spot and futures markets. Such outcome not only provides a theoretical justification for this Permanent-Transitory decomposition; but it offers a simple way of detecting which of the two prices is dominant in the price discovery process. All the results are testable. as can be seen in the application to spot and futures non-ferrous metals prices (Al, Co, Ni, Pb, Zn) traded in the London Metal Exchange (LME). Most markets are in backwardation and futures prices are "information dominant" in highly liquid futures markets (Al, Cu, Ni, Zn)

Pairing market risk with credit risk

This paper uses an exclusive proprietary data set of European Credit Derivatives and VIX markets, covering a sample of 5 to 7 years, to study the nature of the link between credit risk and market risk, widely acknowledged in the academic literature. This allows us to establish cointegration in the VIX and iTraxx/CDS markets in a framework where arbitrageurs exploit temporary equilibrium mispricing following pairs strategies. Expected profits, defined in terms of VECM parameters, are positive for all VIX-iTraxx pairs strategies considered. Markets are integrated in that price discovery on both sides of the Atlantic reflect the same underlying information with predominant price leadership of the VIX market over the European CDS market