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  • Convenience yields in bulk commodities: the case of thermal coal

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    Author(s)
    West, Jason
    Griffith University Author(s)
    West, Jason
    Year published
    2012
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    Abstract
    This study advances the research on the convenience yield of bulk commodities with particular emphasis on thermal coal. We extend the option model of Milonas and Thomadakis (1997) to estimate thermal coal convenience yields using forward prices. We examine the business cycle of thermal coal in the presence of both demand and supply shocks and find that the convenience yield for thermal coal exhibits seasonal behavior. Convenience yields are negatively related to the inventory level of thermal coal despite the inventory not being co-located at the point of consumption while convenience yields are positively related to ...
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    This study advances the research on the convenience yield of bulk commodities with particular emphasis on thermal coal. We extend the option model of Milonas and Thomadakis (1997) to estimate thermal coal convenience yields using forward prices. We examine the business cycle of thermal coal in the presence of both demand and supply shocks and find that the convenience yield for thermal coal exhibits seasonal behavior. Convenience yields are negatively related to the inventory level of thermal coal despite the inventory not being co-located at the point of consumption while convenience yields are positively related to interest rates due to the business cycle. Our estimates of convenience yields for a bulk commodity such as thermal coal is consistent with results for other commodities such as base metals and oil where spot prices are more volatile than forward prices at low inventory levels. The result implies that the costs of storage are generally less than the operating costs associated with changes to production capacity so thermal coal producers prefer to stockpile the commodity rather than adjust production in response to changes in demand.
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    Journal Title
    International Journal of Business and Finance Research
    Volume
    6
    Issue
    4
    Publisher URI
    https://www.theibfr.com/the-international-journal-of-business-and-finance-research-past-issues/
    Copyright Statement
    © 2012 The Institute for Business and Finance Research. The attached file is reproduced here in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
    Subject
    Financial Econometrics
    Accounting, Auditing and Accountability
    Banking, Finance and Investment
    Publication URI
    http://hdl.handle.net/10072/47381
    Collection
    • Journal articles

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