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Business Cycles and the Behavior of Energy Prices

This paper tests the theory of storage-the hypothesis that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases in energy markets (crude oil, heating oil, and unleaded gas markets). We use the Fama and French (1988) indirect test, based on the relative variation in spot and futures prices. The results suggest that the theory holds for the energy markets.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q02: Commodity Markets, Q40: Energy: General, D22: Firm Behavior: Empirical Analysis, D21: Firm Behavior: Theory, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity, G13: Contingent Pricing; Futures Pricing; option pricing, C53: Forecasting Models; Simulation Methods

Keywords: Business cycles, Energy price behavior, Storage, NYMEX, spot prices, futures prices

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No2-7

Published in Volume15, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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