No. 432: Has Futures Trading Affected the Volatility of Aluminium Transactions Prices?
Isabel Figuerola-Ferretti Queen Mary, University of London Christopher L. Gilbert Vrije Universiteit Amsterdam
February 1, 2001
Abstract
We consider how aluminium transactions prices have been affected by the development of futures trading in aluminium. Using a series for transactions prices constructed from a trade journal, we establish that both this series and the exchange cash price may be regarded as error-ridden measures of the same latent variables. Furthermore, the error associated with the exchange price has declined over time. Tests provide weak evidence for a modest increase in volatility in the post-producer pricing period, but a VAR model suggests that this may be accounted for by the rapidly decaying "frothiness" of the exchange price, now increasingly reflected in transactions prices.
J.E.L classification codes: G1, L61
Keywords: Aluminium, Transaction prices, Futures trading, Price volatility