Commodity Modeling and Pricing: Methods for Analyzing Resource Market Behavior

CHAPTER 7

Testing for Temporal Asymmetry in the Metal Price-Stock Relationship

Eugene Kouassi

INTRODUCTION

Many consumers complain that metal prices at the retail level respond faster to international metal market price increases (stock decreases) than to decreases (to an increase in stock). The perceived asymmetry, often construed as an abuse of market power, points to a potential gap in price and/or stock theory (Peltzman 2000). Despite this perception, the economic and econometric analyzes of international metal stock adjustments have received only minimal attention. One reason for this has been the lack of suitable inventory or stock data. Another has been the lack of any uniform theory of inventory behavior or inventory-price relationship to serve as a basis for research. Attempts to study this relationship in metal markets have only had mixed results.

This study uses recent advances in asymmetric time-series analysis (e.g., Enders 2001; Enders and Granger 1998; and Enders and Siklos 2001), and applies them to analyze price and/or stock transmission at various stages in the production and distribution chain in international metal markets. We depart from previous research in identifying the potential role metal future markets may play in asymmetric price or stock transmission. Our analysis takes advantage of newly available inventory data for aluminum, copper, lead, and zinc.

STOCKS AND MARKET EQUILIBRIUM

Not many studies that have attempted to analyze the inventory and ...