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Commodity Derivatives Valuation with Autoregression and Moving Average in the Price Dynamics

Author

Listed:
  • Raphael Paschke

    (University of Mannheim)

  • Marcel Prokopczuk

    () (ICMA Centre, University of Reading)

Abstract

In this paper we develop a continuous time factor model of commodity prices that allows for higher order autoregression and moving average components. The need for these components is documented by analyzing the convenience yield's time series dynamics. Making use of the affine model structure, closed-form pricing formulas for futures and options are derived. Empirically, a parsimonious version of the general model is estimated for the crude oil market using futures data. We demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model improves the pricing of long horizon contracts with information from the short end of the futures curve substantially.

Suggested Citation

  • Raphael Paschke & Marcel Prokopczuk, 2009. "Commodity Derivatives Valuation with Autoregression and Moving Average in the Price Dynamics," ICMA Centre Discussion Papers in Finance icma-dp2009-10, Henley Business School, Reading University, revised Sep 2009.
  • Handle: RePEc:rdg:icmadp:icma-dp2009-10
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    File URL: http://www.icmacentre.ac.uk/files/icma_dp200910marcel.pdf
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    References listed on IDEAS

    as
    1. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
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    More about this item

    Keywords

    Commodity Pricing; CARMA; Futures; Crude Oil;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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