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On Modelling of Crude Oil Futures in a Bivariate State-Space Framework

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Peilun He

    (Macquarie University)

  • Karol Binkowski

    (Macquarie University)

  • Nino Kordzakhia

    (Macquarie University)

  • Pavel Shevchenko

    (Macquarie University)

Abstract

We study a bivariate latent factor model for the pricing of commodity futures. The two unobservable state variables representing the short and long term factors are modelled as Ornstein-Uhlenbeck (OU) processes. The Kalman Filter (KF) algorithm has been implemented to estimate the unobservable factors as well as unknown model parameters. The estimates of model parameters were obtained by maximising a Gaussian likelihood function. The algorithm has been applied to WTI Crude Oil NYMEX futures data.

Suggested Citation

  • Peilun He & Karol Binkowski & Nino Kordzakhia & Pavel Shevchenko, 2021. "On Modelling of Crude Oil Futures in a Bivariate State-Space Framework," Springer Books, in: Marco Corazza & Manfred Gilli & Cira Perna & Claudio Pizzi & Marilena Sibillo (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 273-278, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-78965-7_40
    DOI: 10.1007/978-3-030-78965-7_40
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    References listed on IDEAS

    as
    1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    2. Gareth William Peters & Mark Briers & Pavel Shevchenko & Arnaud Doucet, 2013. "Calibration and Filtering for Multi Factor Commodity Models with Seasonality: Incorporating Panel Data from Futures Contracts," Methodology and Computing in Applied Probability, Springer, vol. 15(4), pages 841-874, December.
    3. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737.
    4. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    5. Kutoyants, Yury A., 2019. "On parameter estimation of the hidden Ornstein–Uhlenbeck process," Journal of Multivariate Analysis, Elsevier, vol. 169(C), pages 248-263.
    6. Christian-Oliver Ewald & Aihua Zhang & Zhe Zong, 2019. "On the calibration of the Schwartz two-factor model to WTI crude oil options and the extended Kalman Filter," Annals of Operations Research, Springer, vol. 282(1), pages 119-130, November.
    7. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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