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Asymmetric volatility of basis and the theory of storage
Author(s) -
Gao Andre H.,
Wang George H. K.
Publication year - 2005
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20144
Subject(s) - futures contract , econometrics , convenience yield , economics , volatility (finance) , spot contract , autoregressive conditional heteroskedasticity , statistics , mathematics , financial economics
The theory of storage states that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. Previous literature has tested this hypothesis using the so‐called “direct test” approach, which employs a direct measurement of inventory levels, or the “indirect test” approach, which examines the relative variation of spot and futures prices and the relative variation of negative basis to positive basis as alternative proxies for inventory levels. The rationale behind the indirect test is based on the hypothesis that futures prices are less variable than spot prices when inventory is low, and have similar variability when inventory is high. The authors propose a “unified test” of the theory of storage that incorporates aspects of both direct and indirect tests in an ARMAX‐asymmetric GARCH model framework. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:399–418, 2005