Journal of Applied Econometrics

Modelling market fundamentals: A model of the aluminium market

Journal Article

Abstract

The standard approach to modelling primary commodity markets under rational expectations is to relate the commodity price to the production and consumption ‘surprises’ (i.e. the innovations on the equations). Using the world aluminium market, we show how this approach can be modified so that both the price and stock can be written in terms of one or more market ‘fundamentals’ which reflect the supply—demand balance on the market. This approach allows joint estimation of production, consumption, stock demand and price equations subject to cross‐equation restrictions. It may be seen as a formalization of the approach adopted by metals industry analysts.

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