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Convenience yields in bulk commodities : the case of thermal coal

journal contribution
posted on 06.12.2017, 00:00 by Jason West
This study advances the research on the convenience yield of bulk commodities with particular emphasis on thermal coal. We extend the option model of Milonas and Thomadakis (1997) to estimate thermal coal convenience yields using forward prices. We examine the business cycle of thermal coal in the presence of both demand and supply shocks and find that the convenience yield for thermal coal exhibits seasonal behavior. Convenience yields are negatively related to the inventory level of thermal coal despite the inventory not being co-located at the point of consumption while convenience yields are positively related to interest rates due to the business cycle. Our estimates of convenience yields for a bulk commodity such as thermal coal is consistent with results for other commodities such as base metals and oil where spot prices are more volatile than forward prices at low inventory levels. The result implies that the costs of storage are generally less than the operating costs associated with changes to production capacity so thermal coal producers prefer to stockpile the commodity rather than adjust production in response to changes in demand.

History

Volume

6

Issue

4

Start Page

33

End Page

44

Number of Pages

12

ISSN

1931-0269

Location

United States

Publisher

Institute for Business and Finance Research

Language

en-aus

Peer Reviewed

Yes

Open Access

No

External Author Affiliations

Griffith University; Not affiliated to a Research Institute;

Era Eligible

Yes

Journal

International journal of business and finance research.

Exports