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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
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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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File URL: http://hdl.handle.net/10.1080/14697688.2010.488654
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 12 (2012)
Issue (Month): 5 (April)
Pages: 781-790

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Handle: RePEc:taf:quantf:v:12:y:2012:i:5:p:781-790

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Cited by:
  1. Suenaga, Hiroaki, 2013. "Measuring bias in a term-structure model of commodity prices through the comparison of simultaneous and sequential estimation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 53-66.

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