In this paper we develop a multi-factor model for the joint dynamics of related commodity spot prices in continuous time. We contribute to the existing literature by simultaneously considering various commodity markets in a single, consistent model. In an application we show the economic significance of our approach. We assume that the spot price processes can be characterized by the weighted sum of latent factors. Employing an essentially-affine model structure allows for rich dependencies among the latent factors and thus, the commodity prices. The co-integrated behavior between the different spot price dynamics is explicitly taken into account. Within this framework we derive closed-form solutions of futures prices. The Kalman Filter methodology is applied to estimate the model for crude oil, heating oil and gasoline futures contracts traded on the NYMEX. Empirically, we are able to identify a common non-stationary equilibrium factor driving the long-term price behavior and stationary factors affecting all three markets in a common way. Additionally, we identify factors which only impact subsets of the commodities considered. To demonstrate the economic consequences of our integrated approach, we evaluate the investment into a refinery from a financial management perspective and compare the results with an approach neglecting the co-movement of prices. This negligence leads to radical changes in the project's assessment.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
5412.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Hannan, E J & Terrell, R D & Tuckwell, N E, 1970.
"The Seasonal Adjustment of Economic Time Series,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(1), pages 24-52, February.
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