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Commodity price modelling that matches current observables: a new approach

  • K. R. Miltersen
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    We develop a stochastic model of the spot commodity price and the spot convenience yield such that the model matches the current term structure of forward and futures prices, the current term structure of forward and futures volatilities, and the inter-temporal pattern of the volatility of the forward and futures prices. We let the underlying commodity price be a geometric Brownian motion and we let the spot convenience yield have a mean-reverting structure. The flexibility of the model, which makes it possible to simultaneously achieve all these goals, comes from allowing the volatility of the spot commodity price, the speed of mean-reversion parameter, the mean-reversion parameter, and the diffusion parameter of the spot convenience yield all to be time-varying deterministic functions.

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

    Volume (Year): 3 (2003)
    Issue (Month): 1 ()
    Pages: 51-58

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    Handle: RePEc:taf:quantf:v:3:y:2003:i:1:p:51-58
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