English, Article, Journal or magazine article edition: Futures Prices in a Production Economy with Investment Constraints Leonid Kogan; Dmitry Livdan; Amir Yaron

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Bookmark: http://trove.nla.gov.au/version/57372
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Futures Prices in a Production Economy with Investment Constraints
Author
  • Leonid Kogan
  • Dmitry Livdan
  • Amir Yaron
Physical Description
  • preprint
Notes
  • We document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a \V-shape". This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying elasticity of supply. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints a?ect ?rms investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the elasticity of supply of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply elasticity results in time-varying volatility of futures prices. Calibrating this model, we show it is quantitatively consistent with the aforementioned V-shape" relationship between the volatility of futures prices and the slope of the term-structure
  • Futures prices, Invest,ment Constraints
  • RePEc:red:sed004:128
  • We document a new stylized fact regarding the term-structure of futures volatility. We show that the relation between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a %u201CV-shape%u201D'. This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms' investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Calibrating this model, we show it is quantitatively consistent with the aforementioned %u201CV-shape%u201D relation between the volatility of futures prices and the slope of the term-structure.
  • RePEc:nbr:nberwo:11509
Language
  • English
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