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London Metal Exchange – Definition

London Metal Exchange Definition

The London metal exchange refers to a future exchange that occupies the largest world market that relies on the future contracts of bases and other metals. The London metal exchange provides cash trading as well as daily, weekly and monthly contracts. The daily agreements last for a period of three months; weekly contracts last for six months while monthly contracts last for up to 10 years. The LME came into active operation in the year 1877. However, its origin can be traced to 1571. Before the introduction of the exchange, the London business was carried out in coffee houses by use of makeshift rings.

A Little More on What is the London Metal Exchange

The London metal exchange began with copper as the only metal for trade. Later zinc and Lead were introduced into the business, but they were only accredited in 1920. During the world war II, the LME was closed until the end of the war when it was then opened in 1954.  Before 2012, the LME trade was owned by the founding members. However, during the year 2012, the LME was sold to the Hong Kong exchanges for a cost of 1.4 billion euros. Even though the metal trading business has been in existence for many decades especially in the UK, the origin of the London metal trading exchange can be traced to the opening of the London Royal Exchange in 1571. During this time, the domestic trade was majorly based on the metals and other commodities. Following the increase in global metal trading, the trading of the LME has also increased significantly. Besides, just like any other market, the metal trading has been adapting to changes in the consumer demands by introducing new metals that meet the customer needs. However, copper and Tin has been trading in the market since the beginning of LME trading.  Other metals such as Zinc and Lead have also been traded in the market for many decades since 1920. Aluminium and nickel were later introduced to the trading contracts. Currently, LME provides one of the largest world markets in options contracts and futures on base and other metals. However, the LME currently operate under the Hon Kong umbrella since it was acquired in 2012.

References for London Metal Exchange

Academic Research on London Metal Exchange (LME)

Metals prices, efficiency and cointegration: some evidence from the London Metal Exchange, MacDonald, R., & Taylor, M. (1988). Bulletin of Economic Research, 40(3), 235-240. This paper examines the factors that determine the prices of metals in the LME markets. The paper further discusses the efficiency and cointegration issues pertaining to the London market exchange. The paper focuses on six bases of metals that are commonly traded in the LME

The forward pricing function of the London Metal Exchange, Goss, B. A. (1981). Applied Economics, 13(2), 133-150. This paper focuses on determining the pricing system that is used in the LME. The study focuses on the forward pricing function as a method of evaluating the pricing model in the LME. According to the author, the current market prices rationally form the future prices, and they are not related to the subsequent spot prices. However, the study present that when the market information is made available to the consumers, then both the future prices and the current spot may be considered to be the market forecast of the subsequent spot prices.

Cointegration and detectable linear and nonlinear causality: analysis using the London Metal Exchange lead contract, Chen*, A. S., & Wuh Lin, J. (2004). Applied Economics, 36(11), 1157-1167. This paper discusses the application of both linear and nonlinear Granger causality evaluation model to evaluate the dynamics that occur in the prices of the LME prices and some possible predictors. It also examines the impacts of the cointegration on both nonlinear and linear Granger causality evaluation. According to the author, inappropriate or failure to detect the nonlinearity is one of the major reasons that contribute to the inappropriate forecast of the future prices.

Long memory and chaotic models of prices on the London Metal Exchange. Panas, E. (2001). Resources Policy, 27(4), 235-246. This paper seeks to evaluate the behaviour of prices in the LME market. The study focuses on testing two most commonly preferred nonlinear models which include long memory and conflicts on some metal commodities.  The paper seeks to a certain which model provide a consistent result regarding the metal price in the non-linear market dynamics. According to the author, much financial time series depicts irregular behaviour. This irregular behaviour is attributed to nonlinear factors in the market.

The ‘efficiency’of the London Metal Exchange: a test with overlapping and non-overlapping data. Canarella, G., & Pollard, S. K. (1986). Journal of Banking & Finance, 10(4), 575-593. This paper seeks to test the hypothesis of the tree approaches regarding the future prices in the LME.  According to the author, the future price model provides an accurate prediction of the future spot prices.  The study is based on the approaches that provide the least bias in the prediction to analyze the effectiveness in the LME particularly for the period between January 1975 to December 1983.  One of the models used in this study applies non-overlapping observation and develop hypothesis using OLS. On the other hand, the second approach uses overlapping data using the ARMA procedures.

A note on the efficiency of the London Metal Exchange. Sephton, P. S., & Cochrane, D. K. (1990). Economics Letters, 33(4), 341-345. This paper examines the hypothesis in the market efficiency regarding six metals used in the LM.  The paper deducts the evidence of contradictory to the aspects of LME by using the overlapping data as well as multimarket and single approaches.

Speculative efficiency on the London metal exchange. Moore, M. J., & Cullen, U. (1995). The Manchester School, 63(3), 235-256. This paper investigates the ideology regarding the unbiasedness of the forwarding rates in predicting future spot rates for the prices of the base metals in the LME.   The study sampled the data that are frequently used in the LME. The outcomes of the findings demonstrated the positive proposition regarding the unbiasedness of the rates.

Copper price behaviour and the London Metal Exchange, Labys, W. C., Rees, H. J. B., & Elliott, C. M. (1971). Applied Economics, 3(2), 99-113. This paper examines the metal price behavior in the LME. The author focuses on the copper metal since it is one of the metals that has been traded for a long period of time. According to the author, the prices of metals in the LME are determined by various factors that directly or indirectly related to the exchange rates.

Testing rational expectations and efficiency in the London Metal Exchange., MacDonald, R., & *, M. P. T. (1988). Oxford Bulletin of Economics and Statistics, 50(1), 41-52. This paper seeks to evaluate the efficacy and the expectation of the stakeholders in the LME. The study presents that many hypotheses have been tested to determine the efficiency in the LME markets. According to the author, a market is considered to be efficient when the market prices reflect all the available market information entirely. The study is based on the use of the Efficient Market Hypothesis which provide that the participants in the market based on their rational expectation may generate equilibrium process that focuses in delivering full return regarding the market activities.

The efficiency of the London Metal Exchange: another look at the evidence. Sephton, P. S., & Cochrane, D. K. (1991). Applied Economics, 23(4), 669-674. This paper illustrates various weaknesses that exist in the London exchange market. According to the authors, the available evidence does not reflect proof of features of an efficient market with regard to risk neutrality and rationality. The study suggested that the tin market portrayed inefficient risk premium during the period between 1976 and 1985. However, the metals such as copper, lead, aluminium, and exhibited efficiency in the London metal exchange market.

Pricing of non-ferrous metals futures on the London Metal Exchange., Watkins, C., & McAleer, M. (2006). Applied Financial Economics, 16(12), 853-880. This paper examines the pricing model for the non-ferrous metal futures in the LME market. The study provides that LME is usually the most important avenue for futures and spot business in the non-ferrous metal industry.  This study is based on data derived from 3-month futures contracts for the metals such as copper, lead, aluminium, nickel zinc and tin. The study used the cost of carrying model and risk premium hypothesis as the standard hypothesis model for determining the prices for future contracts.

The weak form efficiency of the London Metal Exchange., Bird, P. J. (1985). Applied Economics, 17(4), 571-587. This study uses the filter model to test weak form efficiency and dependency in the LME. These models are used to daily futures and cash prices for metals such as lead, copper, zinc and tin. The outcome of the study reflects a positive evidence ineptitude for copper and weaker. However, lead and zinc portrayed positive evidence regarding the LME prices and future contracts. Nonetheless, there was no evidence indicated by tin.

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