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Determinants of oil futures prices and convenience yields

Author

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  • M. A. H. Dempster
  • Elena Medova
  • Ke Tang

Abstract

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.

Suggested Citation

  • M. A. H. Dempster & Elena Medova & Ke Tang, 2012. "Determinants of oil futures prices and convenience yields," Quantitative Finance, Taylor & Francis Journals, vol. 12(12), pages 1795-1809, December.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:12:p:1795-1809
    DOI: 10.1080/14697688.2012.691202
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    References listed on IDEAS

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    1. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.
    2. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Dempster, M.A.H. & Tang, Ke, 2011. "Estimating exponential affine models with correlated measurement errors: Applications to fixed income and commodities," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 639-652, March.
    2. Cummins, Mark & Dowling, Michael & Kearney, Fearghal, 2016. "Oil market modelling: A comparative analysis of fundamental and latent factor approaches," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 211-218.
    3. repec:eee:jbfina:v:84:y:2017:i:c:p:53-67 is not listed on IDEAS
    4. John M. Mulvey, 2012. "Long--short versus long-only commodity funds," Quantitative Finance, Taylor & Francis Journals, vol. 12(12), pages 1779-1785, December.

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