Advanced Search
MyIDEAS: Login

Commodity derivatives valuation with autoregressive and moving average components in the price dynamics

Contents:

Author Info

  • Paschke, Raphael
  • Prokopczuk, Marcel

Abstract

In this paper, we develop a continuous time factor model of commodity prices that allows for higher-order autoregressive and moving average components. We document the need for these components by analyzing the convenience yield's time series dynamics. The model we propose is analytically tractable and allows us to derive closed-form pricing formulas for futures and options. Empirically, we estimate a parsimonious version of the general model for the crude oil futures market and demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model substantially improves the pricing of long-horizon contracts with information from the short end of the futures curve.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VCY-504BT0X-2/2/8b965d6d242cd9d7c7a8fc80d66c1e04
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 11 (November)
Pages: 2742-2752

as in new window
Handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2742-2752

Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Commodity pricing CARMA Futures Crude oil;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  2. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  4. Geman, Hélyette & Kharoubi, Cécile, 2008. "WTI crude oil Futures in portfolio diversification: The time-to-maturity effect," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2553-2559, December.
  5. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  6. Marshall, Ben R. & Cahan, Rochester H. & Cahan, Jared M., 2008. "Can commodity futures be profitably traded with quantitative market timing strategies?," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1810-1819, September.
  7. Nguyen, Vu-Nhat & Geman, Hélyette, 2005. "Soybean Inventory and Forward Curve Dynamics," Economics Papers from University Paris Dauphine 123456789/1937, Paris Dauphine University.
  8. Jaime Casassus & Pierre Collin-Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
  9. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
  10. Hélyette Geman & Vu-Nhat Nguyen, 2005. "Soybean Inventory and Forward Curve Dynamics," Management Science, INFORMS, vol. 51(7), pages 1076-1091, July.
  11. Lien, Donald & Yang, Li, 2008. "Asymmetric effect of basis on dynamic futures hedging: Empirical evidence from commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 187-198, February.
  12. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  13. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  14. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 33-59, March.
  15. Dempster, M.A.H. & Medova, Elena & Tang, Ke, 2008. "Long term spread option valuation and hedging," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2530-2540, December.
  16. Doran, James S. & Ronn, Ehud I., 2008. "Computing the market price of volatility risk in the energy commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2541-2552, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Carmona, Julio & León, Angel & Vaello-Sebastiá, Antoni, 2011. "Does Stock Return Predictability Affect ESO Fair Value?," QM&ET Working Papers 11-2, Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica, revised 16 Jan 2012.
  2. Fred Espen Benth & Claudia Kl\"uppelberg & Gernot M\"uller & Linda Vos, 2012. "Futures pricing in electricity markets based on stable CARMA spot models," Papers 1201.1151, arXiv.org.
  3. Ni, Jian & Chu, Lap Keung & Wu, Feng & Sculli, Domenic & Shi, Yuan, 2012. "A multi-stage financial hedging approach for the procurement of manufacturing materials," European Journal of Operational Research, Elsevier, vol. 221(2), pages 424-431.
  4. Fred Espen Benth & Paul Kr\"uhner, 2014. "Representation of infinite dimensional forward price models in commodity markets," Papers 1403.4111, arXiv.org.
  5. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2742-2752. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.