TY - JOUR AU - Kogan,Leonid AU - Livdan,Dmitry AU - Yaron,Amir TI - Futures Prices in a Production Economy with Investment Constraints JF - National Bureau of Economic Research Working Paper Series VL - No. 11509 PY - 2005 Y2 - August 2005 UR - http://www.nber.org/papers/w11509 L1 - http://www.nber.org/papers/w11509.pdf N1 - Author contact info: Leonid Kogan MIT Sloan School of Management 100 Main Street, E62-636 Cambridge, MA 02142 Tel: 617/504-9728 Fax: 617/258-6855 E-Mail: lkogan@mit.edu Dmitry Livdan Haas School of Business UC, Berkeley 545 Student Services #1900 Berkeley, CA 94720-1900 E-Mail: livdan@haas.berkeley.edu Amir Yaron The Wharton School University of Pennsylvania 2256 Steinberg-Dietrich Hall Philadelphia, PA 19104-6367 Tel: 215/898-1241 Fax: 215/898-6200 E-Mail: yaron@wharton.upenn.edu M2 - featured in NBER digest on 2005-08-01 AB - 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. ER -