MODELING MARKET FUNDAMENTALS - A MODEL OF THE ALUMINUM MARKET

The standard approach to modelling primary commodity markets under rat ional expectations is to relate the commodity price to the production and consumption 'surprises' (i.e. the innovations on the equations). U sing the world aluminium market, we show how this approach can be modi fied so that both the price and stock can be written in terms of one o r more market 'fundamentals' which reflect the supply-demand balance o n the market. This approach allows joint estimation of production, con sumption, stock demand and price equations subject to cross-equation r estrictions. It may be seen as a formalization of the approach adopted by metals industry analysts.