Short-Term Variations and Long-Term Dynamics in Commodity Prices
In this article, we develop a two-factor model of commodity prices that allows meanreversion in short-term prices and uncertainty in the equilibrium level to which prices revert. Although these two factors are not directly observable, they may be estimated from spot and futures prices. Intuitively, movements in prices for long-maturity futures contracts provide information about the equilibrium price level, and differences between the prices for the short- and long-term contracts provide information about short-term variations in prices. We show that, although this model does not explicitly consider changes in convenience yields over time, this short-term/long-term model is equivalent to the stochastic convenience yield model developed in Gibson and Schwartz (1990). We estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil-linked assets to demonstrate its use and some of its advantages over the Gibson-Schwartz model.
Volume (Year): 46 (2000)
Issue (Month): 7 (July)
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- 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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- James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 479-508.
- 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.
- David G. Laughton & Henry D. Jacoby, 1993. "Reversion, Timing Options, and Long-Term Decision-Making," Financial Management, Financial Management Association, vol. 22(3), Fall.
- Eduardo S. Schwartz, 1998. "Valuing Long-Term Commodity Assets," Financial Management, Financial Management Association, vol. 27(1), Spring.
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