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A Preference-Free Formula to Value Commodity Derivatives

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Author Info
Rodriguez, J.C. (Tilburg University, Center for Economic Research)

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Abstract

This paper studies a new model of commodity prices in which the stochastic convenience yield is an affine function of past commodity returns. While preserving market completeness, the model exhibits price nonstationarity and mean reversion under the martingale measure, and, as a consequence, it is able to fit a slowly de- caying term structure of futures return volatilities. The model nests mean reversion in levels and geometric Brownian motion, and renders preference-free formulas for the prices of futures contracts and European options.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-92.

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Date of creation: 2007
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Handle: RePEc:dgr:kubcen:200792

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G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Bessembinder, Hendrik, et al, 1995. " Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure," Journal of Finance, American Finance Association, vol. 50(1), pages 361-75, March. [Downloadable!] (restricted)
  4. Eduardo S. Schwartz, 1998. "Valuing Long-Term Commodity Assets," Financial Management, Financial Management Association, vol. 27(1), Spring.
  5. Schwartz, Eduardo, 1998. "Valuing long-term commodity assets," Journal of Energy Finance & Development, Elsevier, vol. 3(2), pages 85-99. [Downloadable!] (restricted)
  6. Richter, Martin & Sørensen, Carsten, 2002. "Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans," Working Papers 2002-4, Copenhagen Business School, Department of Finance. [Downloadable!]
  7. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April. [Downloadable!] (restricted)
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March. [Downloadable!] (restricted)
  9. Rodriguez, J.C., 2007. "Option Pricing and Momentum," Discussion Paper 2007-93, Tilburg University, Center for Economic Research. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December. [Downloadable!] (restricted)
  12. Xuemin Yan, 2002. "Valuation of commodity derivatives in a new multi-factor model," Review of Derivatives Research, Springer, vol. 5(3), pages 251-271, October. [Downloadable!] (restricted)
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  1. Rodriguez, J.C., 2007. "Option Pricing and Momentum," Discussion Paper 2007-93, Tilburg University, Center for Economic Research. [Downloadable!]
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