The Present Value Model of Rational Commodity

The present value model says that an asset's price equals the sum of current and future discounted expected future payoffs from ownership of the asset. I explore the limits of the present value model by testing its ability to explain the pricing of storable commodities. For commodities the payoff stream is the convenience yield that accrues from holding inventories, and it can be measured directly from spot and futures prices. The present value model imposes restrictions on the joint dynamics of spot and futures prices, which I test for four commodities. I find a close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same when one looks at the serial dependence of excess returns. These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.