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Time-varying long-run mean of commodity prices and the modeling of futures term structures

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  • Ke Tang

Abstract

The exploration of the mean-reversion of commodity prices is important for inventory management, inflation forecasting and contingent claim pricing. Bessembinder et al. [ J . Finance , 1995, 50 , 361--375] document the mean-reversion of commodity spot prices using futures term structure data; however, mean-reversion to a constant level is rejected in nearly all studies using historical spot price time series. This indicates that the spot prices revert to a stochastic long-run mean. Recognizing this, I propose a reduced-form model with the stochastic long-run mean as a separate factor. This model fits the futures dynamics better than do classical models such as the Gibson--Schwartz [ J . Finance , 1990, 45 , 959--976] model and the Casassus--Collin-Dufresne [ J . Finance , 2005, 60 , 2283--2331] model with a constant interest rate. An application for option pricing is also presented in this paper.

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  • Ke Tang, 2012. "Time-varying long-run mean of commodity prices and the modeling of futures term structures," Quantitative Finance, Taylor & Francis Journals, vol. 12(5), pages 781-790, April.
    • Handle: RePEc:taf:quantf:v:12:y:2012:i:5:p:781-790
    DOI: 10.1080/14697688.2010.488654
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    4. Ma, Zonggang & Ma, Chaoqun & Wu, Zhijian, 2020. "Closed-form analytical solutions for options on agricultural futures with seasonality and stochastic convenience yield," Chaos, Solitons & Fractals, Elsevier, vol. 137(C).
    5. Chih-Chen Hsu & An-Sing Chen & Shih-Kuei Lin & Ting-Fu Chen, 2017. "The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 819-848, April.
    6. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
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    8. Delphine Lautier & Franck Raynaud, 2014. "Information Flows in the term structure of commodity prices," Post-Print hal-01655842, HAL.

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