Commodity Derivatives Valuation with Autoregression and Moving Average in the Price Dynamics
AbstractIn this paper we develop a continuous time factor model of commodity prices that allows for higher order autoregression and moving average components. The need for these components is documented by analyzing the convenience yield's time series dynamics. Making use of the affine model structure, closed-form pricing formulas for futures and options are derived. Empirically, a parsimonious version of the general model is estimated for the crude oil market using futures data. We demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model improves the pricing of long horizon contracts with information from the short end of the futures curve substantially.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2009-10.
Length: 41 pages
Date of creation: May 2009
Date of revision: Sep 2009
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Commodity Pricing; CARMA; Futures; Crude Oil;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
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.:
- 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.
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