The predictive power of convenience yields

Abstract

A convenience yield or benefit associated with holding a physical commodity reflects the market's expectations about its future availability. This article explores the in- and out-of-sample predictive power of convenience yields with respect to future spot prices of five mineral commodities— aluminum, copper, lead, nickel, and zinc— for the period of 1983–2017. To that end, alternative measures of convenience yields are considered. The in-sample results show that convenience yields may explain the evolution of future spot prices at short-time horizons of 1, 3, and 6 months, while interest rates and nominal exchange rates may be more relevant at a 12-month horizon. By contrast out-of-sample forecasts show that convenience yields and the de-trended real oil price may have more predictive power with respect to future spot prices than interest and exchange rates within 1–12 months. In addition, this article offers new evidence on the informational content of convenience yields of mineral commodities and oil with respect to the business cycles of Australia, Canada, China, Japan, and the United States, among others.