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Price Mean Reversion and Seasonality in Agricultural Commodity Markets

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  • Jin, Na
  • Lence, Sergio
  • Hart, Chad

Abstract

Schwartz's (1997) two-factor model is generalized to allow for mean reversion in spot prices. Our modeling also acknowledges that commodities exhibit seasonality patterns in the spot price. A Bayesian MCMC algo- rithm is developed to estimate our model. Estimation of the Schwartz model is done by imposing appropriate restrictions to our model. Estimation results are obtained based on monthly observations of soybean futures prices and options prices from the Chicago Board of Trade over period from January 1978 to January 2010. We empirically estimate and compare our model with the Schwartz model, and show how the assumption of mean reversion in spot prices and seasonality a_x000B_ect the prediction of futures prices and option premium with short and long times to maturity.

Suggested Citation

Handle: RePEc:ags:nccc10:285317
DOI: 10.22004/ag.econ.285317
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