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Theory of Storage and the Pricing of Commodity Claims

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  • Martin J. Nielsen

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  • Eduardo S. Schwartz
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    Abstract

    We extend the literature on commodity pricing by incorporating a link between the spread of forward prices and spot price volatility suggested by the theory of storage. Our model has closed form solutions that are generalizations of the two-factor model of Gibson--Schwartz (1990). We estimate the model on daily copper spot and forward prices using the Kalman filter methodology. Our findings confirm the link between the forward spread and volatility, but also show that the Gibson--Schwartz (1990) model prices forward contracts almost as well. In the pricing of option contracts, however, there are significant differences between the models.

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    Article provided by Springer in its journal Review of Derivatives Research.

    Volume (Year): 7 (2004)
    Issue (Month): 1 ()
    Pages: 5-24

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    Handle: RePEc:kap:revdev:v:7:y:2004:i:1:p:5-24
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102989

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    Cited by:

    1. Anh Ngoc Lai & Constantin Mellios, 2015. "Valuation of commodity derivatives with an unobservable convenience yield," Post-Print halshs-01183166, HAL.
    2. Fan, Kun & Shen, Yang & Siu, Tak Kuen & Wang, Rongming, 2015. "Valuing commodity options and futures options with changing economic conditions," Economic Modelling, Elsevier, vol. 51(C), pages 524-533.
    3. Finbarr Murphy & Ehud Ronn, 2015. "The valuation and information content of options on crude-oil futures contracts," Review of Derivatives Research, Springer, vol. 18(2), pages 95-106, July.
    4. Liu, Peng & Tang, Ke, 2011. "The stochastic behavior of commodity prices with heteroskedasticity in the convenience yield," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 211-224, March.
    5. Suenaga, Hiroaki, 2013. "Measuring bias in a term-structure model of commodity prices through the comparison of simultaneous and sequential estimation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 53-66.
    6. George M. Korniotis, 2009. "Does speculation affect spot price levels? the case of metals with and without futures markets," Finance and Economics Discussion Series 2009-29, Board of Governors of the Federal Reserve System (U.S.).
    7. Lin, Chuanyi & Roberts, Matthew C., 2006. "Storability on Modeling Commodity Futures Prices," 2006 Annual meeting, July 23-26, Long Beach, CA 21484, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Anders B. Trolle & Eduardo S. Schwartz, 2009. "Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4423-4461, November.
    9. Ke Du, 2013. "Commodity Derivative Pricing Under the Benchmark Approach," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2.
    10. Ochieng', Otieno Geoffrey, 2010. "Effect of Value Addition on Price: A Hedonic Analysis of Peanut in Retail Supermarkets in Nairobi, Kenya," Research Theses 134495, Collaborative Masters Program in Agricultural and Applied Economics.
    11. Fouquau, Julien & Six, Pierre, 2015. "A comparison of the convenience yield and interest-adjusted basis," Finance Research Letters, Elsevier, vol. 14(C), pages 142-149.
    12. Pieroni, Luca & Ricciarelli, Matteo, 2008. "Modelling dynamic storage function in commodity markets: Theory and evidence," Economic Modelling, Elsevier, vol. 25(5), pages 1080-1092, September.
    13. Almansour, Abdullah, 2016. "Convenience yield in commodity price modeling: A regime switching approach," Energy Economics, Elsevier, vol. 53(C), pages 238-247.

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