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theses

This thesis includes three essays. These essays focus on the commodity market and cover a wide range of topics. Their topics range from the roles of inventory, pricing strategies to impacts of government policies on the commodity market. The first essay provides an analytical framework to distinguish the roles of inventory by investigating their behaviors in a frequency domain. If inventory was used as a buffer for demand shocks, then the stock level should decrease at all frequencies under both the production smoothing and the stockout avoidance strategies. The inventory investment is negative at all frequencies under the stockout avoidance strategy while it is negative at high frequencies (short-term) and is positive at low frequencies (long-term). On the other hand, if inventory is used as a speculative tool, then its level and the inventory investment should increase with the increases in demand and prices at all frequencies. The volatilities of inventory investment also reveal the roles of inventory. Under production smoothing theory, inventory investment is as volatile as the demand at all frequencies while it is as volatile as the output if growth is persistent but less volatile than output if growth is not persistent. The crude oil inventory at the aggregate level followed the inventory the smoothing motive in the period of flexible production from 1/1931 to 12/1972 and the stockout avoidance motive during the period of restricted production from 1/1973-12/2012. The oil inventory at Cushing exhibits a speculative characteristic. However, trading inventory at Cushing did not have effects on price. Price was determined by supply and demand at the aggregate level. The second essay studies role pricing strategies in the price discovery process through a supply chain, especially in the case of stainless steel. Full cost pricing is shown to connect the component costs to the product price. The surcharge system employed by stainless steel industry has linked nickel price, the major component cost, to the price of stainless steel. The reason that nickel but other components played a key role in determining the movement of stainless steel price was its volatility. Nickel futures market also helps guide the price discovery process and production planning of stainless steel. Nickel futures provide a tool to manage stainless steel risk since they are proven to be the accurate predictors of stainless steel prices under different loss functions compared to no-change forecast in most of our real-time data tests after accounting for shift in relationship of nickel and stainless steel over time. The third essay studies the impacts of government interventions on the commodity market, specifically steel contracts. The interventions from the Chinese government provided an interesting natural experiment on the futures market in which two different steel contracts, reinforced bar (rebar) and hot rolled coil (HRC), both reflected the same fundamentals but were subjected to different degrees of regulations. These interventions impacted trading activities and market quality of both contracts. The intervention mechanism shows that the deteriorating market quality of the HRC was the result of increasing volatility stemming from the speculation of government intervention in the rebar market. Speculative activities led to stronger comovement between these two contracts and less informative prices. We also found evidence of informed trading activities in the market. Higher trading volume and lower open interest indicate the occurance of an intervention announcement in the next day.

ETD_8961

Ph.D.

Includes bibliographical references

by Phat Vinh Luong

doi:10.7282/T3QC06X0

ETD doctoral

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