Details
| Original language | English |
|---|---|
| Pages (from-to) | 2742-2752 |
| Number of pages | 11 |
| Journal | Journal of Banking and Finance |
| Volume | 34 |
| Issue number | 11 |
| Publication status | Published - 1 Nov 2010 |
| Externally published | Yes |
Abstract
In this paper, we develop a continuous time factor model of commodity prices that allows for higher-order autoregressive and moving average components. We document the need for these components by analyzing the convenience yield's time series dynamics. The model we propose is analytically tractable and allows us to derive closed-form pricing formulas for futures and options. Empirically, we estimate a parsimonious version of the general model for the crude oil futures market and demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model substantially improves the pricing of long-horizon contracts with information from the short end of the futures curve.
Keywords
- CARMA, Commodity pricing, Crude oil, Futures
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Banking and Finance, Vol. 34, No. 11, 01.11.2010, p. 2742-2752.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Commodity derivatives valuation with autoregressive and moving average components in the price dynamics
AU - Paschke, Raphael
AU - Prokopczuk, Marcel
PY - 2010/11/1
Y1 - 2010/11/1
N2 - In this paper, we develop a continuous time factor model of commodity prices that allows for higher-order autoregressive and moving average components. We document the need for these components by analyzing the convenience yield's time series dynamics. The model we propose is analytically tractable and allows us to derive closed-form pricing formulas for futures and options. Empirically, we estimate a parsimonious version of the general model for the crude oil futures market and demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model substantially improves the pricing of long-horizon contracts with information from the short end of the futures curve.
AB - In this paper, we develop a continuous time factor model of commodity prices that allows for higher-order autoregressive and moving average components. We document the need for these components by analyzing the convenience yield's time series dynamics. The model we propose is analytically tractable and allows us to derive closed-form pricing formulas for futures and options. Empirically, we estimate a parsimonious version of the general model for the crude oil futures market and demonstrate the model's superior performance in pricing nearby futures contracts in- and out-of-sample. Most notably, the model substantially improves the pricing of long-horizon contracts with information from the short end of the futures curve.
KW - CARMA
KW - Commodity pricing
KW - Crude oil
KW - Futures
UR - http://www.scopus.com/inward/record.url?scp=77955919536&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2010.05.010
DO - 10.1016/j.jbankfin.2010.05.010
M3 - Article
AN - SCOPUS:77955919536
VL - 34
SP - 2742
EP - 2752
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
IS - 11
ER -