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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

  • Jin, Na & Lence, Sergio & Hart, Chad, 2010. "Price Mean Reversion and Seasonality in Agricultural Commodity Markets," 2010 Conference, April 19-20, 2010, St. Louis, Missouri 285317, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc10:285317
    DOI: 10.22004/ag.econ.285317
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    File URL: https://ageconsearch.umn.edu/record/285317/files/confp14-10.pdf
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    References listed on IDEAS

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    1. Richard L. Peterson & Christopher K. Ma & Robert J. Ritchey, 1992. "Dependence in commodity prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(4), pages 429-446, August.
    2. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    3. 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.
    4. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(1), pages 33-59, March.
    5. M. T. Allen & C. K. Ma & R. D. Pace, 1994. "Over‐Reactions In Us Agricultural Commodity Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 45(2), pages 240-251, May.
    6. Hannan, E J & Terrell, R D & Tuckwell, N E, 1970. "The Seasonal Adjustment of Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(1), pages 24-52, February.
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    Cited by:

    1. Schmitz, Adam & ZhiguangWang,, 2014. "Bayesian Analysis of a Comprehensive Model for Agricultural Futures," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285809, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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