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Valuation of commodity derivatives with an unobservable convenience yield

Author

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  • Anh Ngoc Lai

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Constantin Mellios

    (PRISM - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Panthéon-Sorbonne)

Abstract

This paper extends the existing literature on commodity derivatives to account for an unobservable stochastic convenience yield. Investors operate in an economy with incomplete information. In contrast to other incomplete information models, analytical formulas for forward and futures prices, as well as for European options on forward and futures contracts are obtained. These formulas reveal the important role played by the initial values of the estimator of the convenience yield and of the estimation error respectively when valuing commodity derivatives. We estimate Schwartz׳s [11] model and the incomplete information model based on the discrete-time Kalman filtering method. For futures prices, the latter seems to perform better than the former. Moreover, Schwartz׳s model provides higher option prices than the incomplete information model. The most important differences are obtained for higher futures prices and for longer options maturities.

Suggested Citation

  • Anh Ngoc Lai & Constantin Mellios, 2016. "Valuation of commodity derivatives with an unobservable convenience yield," Post-Print halshs-01183166, HAL.
  • Handle: RePEc:hal:journl:halshs-01183166
    DOI: 10.1016/j.cor.2015.03.007
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01183166
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    File URL: https://halshs.archives-ouvertes.fr/halshs-01183166/document
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    References listed on IDEAS

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    Keywords

    convenience yield; unobservable variables; incomplete information; Commodity spot prices; futures prices; option prices; interest rates;

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