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Empirical Performance of Commodity Pricing Models: When is it Worthwhile to Use a Stochastic Volatility Specification?

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  • Gonzalo Cortazar
  • Simon Gutierrez
  • Hector Ortega

Abstract

We compare the empirical pricing performance of three models: a constant volatility model, a two‐factor stochastic volatility model, and a one‐factor stochastic volatility model with a model‐free implied variance specification. Results of applying these models to oil, copper, and gold derivatives are consistent for all commodities and highlight the relative benefits of the different models implying that in choosing the best model to implement in a real situation, careful consideration must be given to the tradeoffs between effort and precision. We believe our results are not only new, but also relevant for practitioners. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:457–487, 2016

Suggested Citation

  • Gonzalo Cortazar & Simon Gutierrez & Hector Ortega, 2016. "Empirical Performance of Commodity Pricing Models: When is it Worthwhile to Use a Stochastic Volatility Specification?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 457-487, May.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:5:p:457-487
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    2. Benjamin Tin Chun Cheng, 2017. "Pricing and Hedging of Long-Dated Commodity Derivatives," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2017.
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    4. Cortazar, Gonzalo & Lopez, Matias & Naranjo, Lorenzo, 2017. "A multifactor stochastic volatility model of commodity prices," Energy Economics, Elsevier, vol. 67(C), pages 182-201.
    5. Campos, I. & Cortazar, G. & Reyes, T., 2017. "Modeling and predicting oil VIX: Internet search volume versus traditional mariables," Energy Economics, Elsevier, vol. 66(C), pages 194-204.
    6. Cheng, Benjamin & Nikitopoulos, Christina Sklibosios & Schlögl, Erik, 2018. "Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 148-166.

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