Spread, inventory and spot price volatility in the platinum market

The central idea of the theory of storage is that the level of inventory influences the effect that changes in the demand-and-supply conditions have on spot and futures prices. With the use of monthly data for the period January 1992 to January 2010, I find that the predictions of the theory of storage do not always hold in the platinum market. In conflict with the theoretical predictions, I find that: i) demand-and-supply shocks will have the same effect on spot and futures prices, regardless of the level of inventory; and ii) changes in spot prices have very similar effects on the changes in futures prices when inventory is high and when it is low. In support of the theory of storage, I find a significant negative correlation between the volatility of spot prices and inventory throughout the sample period. Thereafter, I test the forecasting ability of the spot price volatility by employing a GARCH-t(1,1) model and find that volatility can be forecast fairly accurately for short periods, during which the spot prices are somewhat stable.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2011

Author dc:creator

• Wilks, Megan

Advisor dc:contributor.advisor

• Hassan, Shakill

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/12453

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/12453