Option Pricing on Renewable Commodity Markets
Options markets on agricultural commodities with maturities that exceed 13 months seldom trade. Our hypothesis is that this market failure is due to the absence of an accurate option pricing model for commodities where mean reversion can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities where supply response works to bring prices back to production costs. The model suggests that traditional option pricing models will overprice long-term options on these markets.
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- Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000.
"Equilibrium Forward Curves for Commodities,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1297-1338, 06.
- Bryan Routledge & Duane Seppi & Chester Spatt, "undated". "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-49, Carnegie Mellon University, Tepper School of Business.
- Bryan Routledge & Duane Seppi & Chester Spatt, "undated". "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-50, Carnegie Mellon University, Tepper School of Business.
- Bessembinder, Hendrik, et al, 1995. " Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure," Journal of Finance, American Finance Association, vol. 50(1), pages 361-375, March. Full references (including those not matched with items on IDEAS)
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