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Commodity price modelling that matches current observables: a new approach

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  • K. R. Miltersen
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    Abstract

    We develop a stochastic model of the spot commodity price and the spot convenience yield such that the model matches the current term structure of forward and futures prices, the current term structure of forward and futures volatilities, and the inter-temporal pattern of the volatility of the forward and futures prices. We let the underlying commodity price be a geometric Brownian motion and we let the spot convenience yield have a mean-reverting structure. The flexibility of the model, which makes it possible to simultaneously achieve all these goals, comes from allowing the volatility of the spot commodity price, the speed of mean-reversion parameter, the mean-reversion parameter, and the diffusion parameter of the spot convenience yield all to be time-varying deterministic functions.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/713666159
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    Bibliographic Info

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

    Volume (Year): 3 (2003)
    Issue (Month): 1 ()
    Pages: 51-58

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    Handle: RePEc:taf:quantf:v:3:y:2003:i:1:p:51-58

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    Web page: http://www.tandfonline.com/RQUF20

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    Cited by:
    1. Anders B. Trolle & Eduardo S. Schwartz, 2006. "Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives," NBER Working Papers 12744, National Bureau of Economic Research, Inc.
    2. Chiarella, Carl & Kang, Boda & Nikitopoulos, Christina Sklibosios & Tô, Thuy-Duong, 2013. "Humps in the volatility structure of the crude oil futures market: New evidence," Energy Economics, Elsevier, vol. 40(C), pages 989-1000.
    3. Carl Chiarella & Boda Kang & Christina Nikitopoulos-Sklibosios & Thuy-Duong To, 2012. "Humps in the Volatility Structure of the Crude Oil Futures Market," Research Paper Series 308, Quantitative Finance Research Centre, University of Technology, Sydney.

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