Price Discovery in the Aluminium Market
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An extended version of the S. Beveridge and C. R. Nelson (1981) decomposition
and a latent variable approach are used to examine how the noise content,
and therefore the informativeness, of four aluminum prices that have
been quoted at various times since 1970 the (now defunct) U.S. producer
price, a transactions price reported in a trade journal, and the LME and
Comex exchange prices. It was found that the start of aluminum futures trading
in 1978 resulted in greater price transparency in the sense that the information
content of transactions prices increased. LME prices quickly came to
be more informative than published transactions prices. Although the initial
Comex aluminum contract failed to attract liquidity and had low information
content, the 1999 contract, trading currently, is as transparent as the LME
contract.
