@article{Power:37608,
      recid = {37608},
      author = {Power, Gabriel J. and Turvey, Calum G.},
      title = {On Term Structure Models of Commodity Futures Prices and  the Kaldor-Working Hypothesis},
      address = {2008},
      number = {1314-2016-102648},
      series = {2008 NCCC-134 Conference on Applied Commodity Price  Analysis, Forecasting, and Market Risk Management},
      pages = {23},
      year = {2008},
      abstract = {Both prices and the volatility of storable agricultural  commodity futures contracts have been rising since 2005 and  particularly since 2007. This paper aims to answer two  principal questions: (i) How has the behavior of these  futures prices over time and across maturities changed with  the rise of biofuels and their demand-side pres- sure on  corn and related crops?, and (ii) Is there now stronger or  weaker evidence of the Kaldor-Working convenience  yield-storage hypothesis, whereby futures price  backwardation can be explained by the high value of  remaining inventory stocks when these are near stockouts?  The empirical application is to Chicago Board of Trade  corn, wheat and soybeans futures. To make use of all  available futures data rather than only the nearby, this  paper adopts a recently developed affine term structure  model approach and conducts estimation in state-space form  using the Kalman filter. A novel aspect of the research is  that it allows an arbitrary number N of state vari- ables,  where more variables provide further precision and  curvature but at a higher computational cost. It is found  that a three-state variable model containing both ran- dom  walk and mean reversion components provides the most  parsimonious fit during 1988-2004, but that a simple  one-state variable model is optimal for the period 2005-  2007. The main implication is that futures prices since  2005 behave much more like a \random walk" than before.  Also, the model allows us to estimate the term struc- ture  of volatility and it is found that distant maturity futures  should be expected to be much more volatile than  historically normal. Two practical but only tentative  implications are: (a) hedgers should use significantly  lower hedge ratios than before, and (b) for traders, the  classic Black-Scholes option pricing solution should  perform better now than it has historically. Lastly, the  paper finds partial empirical support for the convenience  yield relationship with relative inventory stocks,  especially for soybeans and wheat.},
      url = {http://ageconsearch.umn.edu/record/37608},
      doi = {https://doi.org/10.22004/ag.econ.37608},
}