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Time-varying long-run mean of commodity prices and the modeling of futures term structures

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  • Ke Tang

Abstract

The exploration of the mean-reversion of commodity prices is important for inventory management, inflation forecasting and contingent claim pricing. Bessembinder et al. [ J . Finance , 1995, 50 , 361--375] document the mean-reversion of commodity spot prices using futures term structure data; however, mean-reversion to a constant level is rejected in nearly all studies using historical spot price time series. This indicates that the spot prices revert to a stochastic long-run mean. Recognizing this, I propose a reduced-form model with the stochastic long-run mean as a separate factor. This model fits the futures dynamics better than do classical models such as the Gibson--Schwartz [ J . Finance , 1990, 45 , 959--976] model and the Casassus--Collin-Dufresne [ J . Finance , 2005, 60 , 2283--2331] model with a constant interest rate. An application for option pricing is also presented in this paper.

Suggested Citation

  • Ke Tang, 2012. "Time-varying long-run mean of commodity prices and the modeling of futures term structures," Quantitative Finance, Taylor & Francis Journals, vol. 12(5), pages 781-790, April.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:5:p:781-790
    DOI: 10.1080/14697688.2010.488654
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    1. repec:dau:papers:123456789/13631 is not listed on IDEAS
    2. Almansour, Abdullah, 2016. "Convenience yield in commodity price modeling: A regime switching approach," Energy Economics, Elsevier, vol. 53(C), pages 238-247.
    3. 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.
    4. repec:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0569-x is not listed on IDEAS
    5. repec:kap:revdev:v:20:y:2017:i:2:d:10.1007_s11147-016-9126-y is not listed on IDEAS

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