Commodity Price Dynamics and Derivatives Valuation: A Review

In this paper, we propose an easy-to-use yet comprehensive model for a system of cointegrated commodity prices. While retaining the exponential affine structure of previous approaches, our model allows for an arbitrary number of cointegration relationships. We show that the cointegration component allows capturing well-known features of commodity prices, i.e., upward sloping (contango) and downward sloping (backwardation) term-structures, smaller volatilities for longer maturities and an upward sloping correlation term structure. The model is calibrated to futures price data of ten commodities. The results provide compelling evidence of cointegration in the data.Implications for the prices of futures and options written on common commodity spreads (e.g., spark spread and crack spread) are thoroughly investigated. Meeting held in Amsterdam for helpful comments and suggestions. We are also grateful to AXPO AG for sharing data.

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Advances in the Commodity Futures Literature: A Review

Skiadopoulos

2013

JOD

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Commodity Price Dynamics and Derivatives Valuation: A Review

Cited by 3 publications

References 168 publications

Numerical analysis for Spread option pricing model of markets with finite liquidity: first-order feedback model

Numerical analysis for Spread option pricing model of markets with finite liquidity: first-order feedback model

A Two-Factor Cointegrated Commodity Price Model with an Application to Spread Option Pricing

Advances in the Commodity Futures Literature: A Review

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