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Comparison of commodity future pricing approaches with cointegration techniques

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  • Christian Stepanek

    (Institute of Materials Resource Management, University of Augsburg, 86135 Augsburg, Germany)

Abstract

Commodity future prices are explained either by price expectations and a risk premium in the theory of normal backwardation or with the theory of storage in a cost of carry valuation. Both approaches are compared in separate equations with Johansen cointegration tests. The data sample contains five LME metals with maturities of 3–27 months and real inventory data. It is found that expected spot prices explain only short maturity future prices. But the cost of carry approach, with the inventory level-dependent convenience yield, explains prices for all maturities.

Suggested Citation

  • Christian Stepanek, 2015. "Comparison of commodity future pricing approaches with cointegration techniques," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-31.
    • Handle: RePEc:wsi:jfexxx:v:02:y:2015:i:01:n:s2345768615500026
    DOI: 10.1142/S2345768615500026
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/607 is not listed on IDEAS
    2. Giovanni BARONE-ADESI & Helyette GEMAN & John THEAL, 2009. "On the Lease Rate, the Convenience Yield and Speculative Effects in the Gold Futures Market," Swiss Finance Institute Research Paper Series 09-07, Swiss Finance Institute.
    3. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
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    Cited by:

    1. Jiao Li, 2016. "Trading VIX Futures under Mean Reversion with Regime Switching," Papers 1605.07945, arXiv.org, revised Jun 2016.
    2. Jiao Li, 2016. "Trading VIX futures under mean reversion with regime switching," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-20, September.

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