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Convenience yield in commodity price modeling: A regime switching approach

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  • Almansour, Abdullah

Abstract

This paper attempts to model the futures term structures of crude oil and natural gas using the notion of convenience yield in a regime switching framework. Unlike the existing studies, which assume the convenience yield to have either a constant value or to have a stochastic behavior with mean reversion to one equilibrium level, the model of this paper extends the Gibson and Schwartz (1990) model to allow for regime switching in the convenience yield along with the other parameters. A closed form solution for the futures price is derived and the model parameters are estimated using the maximum likelihood method. The results show that the estimated regimes are very close to the contango and backwardation regimes commonly seen in futures markets. The results also show that the transitional probabilities play an important role in shaping the futures term structure implied by the model.

Suggested Citation

  • Almansour, Abdullah, 2016. "Convenience yield in commodity price modeling: A regime switching approach," Energy Economics, Elsevier, vol. 53(C), pages 238-247.
    • Handle: RePEc:eee:eneeco:v:53:y:2016:i:c:p:238-247
    DOI: 10.1016/j.eneco.2014.06.016
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    Cited by:

    1. Zonggang Ma & Chaoqun Ma & Zhijian Wu, 2022. "Pricing commodity-linked bonds with stochastic convenience yield, interest rate and counterparty credit risk: application of Mellin transform methods," Review of Derivatives Research, Springer, vol. 25(1), pages 47-91, April.
    2. Maryam Ahmadi & Niaz Bashiri Behmiri & Matteo Manera, 2020. "The theory of storage in the crude oil futures market, the role of financial conditions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1160-1175, July.
    3. Moreno, Manuel & Novales, Alfonso & Platania, Federico, 2019. "Long-term swings and seasonality in energy markets," European Journal of Operational Research, Elsevier, vol. 279(3), pages 1011-1023.
    4. Babacar Seck & Robert J. Elliott, 2021. "Regime Switching Entropic Risk Measures on Crude Oil Pricing," Papers 2112.13041, arXiv.org.
    5. Oleksandr Castello & Marina Resta, 2023. "A Machine-Learning-Based Approach for Natural Gas Futures Curve Modeling," Energies, MDPI, vol. 16(12), pages 1-22, June.
    6. Oguzhan Cepni, Duc Khuong Nguyen, and Ahmet Sensoy, 2022. "News Media and Attention Spillover across Energy Markets: A Powerful Predictor of Crude Oil Futures Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    7. Ma, Zonggang & Ma, Chaoqun & Wu, Zhijian, 2020. "Closed-form analytical solutions for options on agricultural futures with seasonality and stochastic convenience yield," Chaos, Solitons & Fractals, Elsevier, vol. 137(C).
    8. Marek Kwas & Michał Rubaszek, 2021. "Forecasting Commodity Prices: Looking for a Benchmark," Forecasting, MDPI, vol. 3(2), pages 1-13, June.

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    More about this item

    Keywords

    Futures term structure; Regime switching; Convenience yield; Contango; Backwardation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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