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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

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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

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