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Determinants of oil futures prices and convenience yields

Listed author(s):
  • M. A. H. Dempster
  • Elena Medova
  • Ke Tang
Registered author(s):

Commodity futures prices are usually modelled using affine term structure spot price models with latent factors extracted from the data. However, very little research to date has considered the question -- What are the economic drivers behind the calibrated latent factors? This paper addresses this question in the context of a three-factor -- short-, medium- and long-term -- model for crude oil spot prices by studying the relations between these factors and appropriate economic variables. An affine combination of the short- and medium-term factors is identified as the (instantaneous) convenience yield. Estimating a structural vector auto-regression model we find that the short-term factor mainly relates to demand variables in the physical markets and to trading variables in the futures markets (such as the net short position of commercial hedgers), the medium-term factor relates to business cycles, demand and trading variables, and the long-term factor relates mainly to financial factors.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 12 (2012)
Issue (Month): 12 (December)
Pages: 1795-1809

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Handle: RePEc:taf:quantf:v:12:y:2012:i:12:p:1795-1809
DOI: 10.1080/14697688.2012.691202
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