NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Futures Prices in a Production Economy with Investment Constraints

Leonid Kogan, Dmitry Livdan, Amir Yaron

NBER Working Paper No. 11509
Issued in August 2005
NBER Program(s):Asset Pricing

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 “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 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 “V-shape” relation between the volatility of futures prices and

the slope of the term-structure.

download in pdf format
   (363 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11509

Published: Leonid Kogan, Dmitry Livdan and Amir Yaron. Journal of Finance, 2009, vol. 64, issue 3, pages 1345-1375

Users who downloaded this paper also downloaded* these:
Kahn and Kotchen w16241 Environmental Concern and the Business Cycle: The Chilling Effect of Recession
Farhi and Tirole w15138 Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts
Hong and Yogo w16712 What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?
Casassus, Collin-Dufresne, and Routledge w11864 Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology
Gorton, Hayashi, and Rouwenhorst w13249 The Fundamentals of Commodity Futures Returns
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us