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Can Gaussian factor models of commodity prices capture the financialization phenomenon?

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  • Aiube, Fernando Antonio Lucena
  • Faquieri, Winicius Botelho

Abstract

In this paper we investigate whether Gaussian factor models can capture the financialization of commodity markets. The use of convenience yield as a stochastic factor is a common practice in the literature. This variable reflects the behavior of producers and physical traders. On the other hand, the great presence of financial traders during the financialization period could make the convenience yield factor less relevant for modeling the term structure of future prices. We find that the inclusion of the convenience yield as a second factor during the financialization improves the fit to empirical data. Hence, in the class of Gaussian factor models the convenience yield has a prominent role even in the financialization context.

Suggested Citation

  • Aiube, Fernando Antonio Lucena & Faquieri, Winicius Botelho, 2019. "Can Gaussian factor models of commodity prices capture the financialization phenomenon?," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:ecofin:v:50:y:2019:i:c:s1062940819300117
    DOI: 10.1016/j.najef.2019.101028
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    More about this item

    Keywords

    Gaussian factor models; Commodity prices; Financialization of commodities;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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