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Commodity Derivatives Valuation with Autoregression and Moving Average in the Price Dynamics

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Author Info

  • Raphael Paschke

    (University of Mannheim)

  • Marcel Prokopczuk

    ()
    (ICMA Centre, University of Reading)

Abstract

In 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 Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2009-10.

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Length: 41 pages
Date of creation: May 2009
Date of revision: Sep 2009
Handle: RePEc:rdg:icmadp:icma-dp2009-10

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Related research

Keywords: Commodity Pricing; CARMA; Futures; Crude Oil;

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  1. 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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