Seasonal and stochastic effects in commodity forward curves

Abstract

In this paper we develop a new model for the dynamics of forward curves of commodities exhibiting seasonalities, such as natural gas, electricity or agricultural commodities. In the existing literature on the subject, the first state variable in multi-factor models is the commodity price, which combines seasonal and stochastic features and may be unobservable. We propose to use instead the average forward price, which is devoid of seasonality and conveys a more robust representation of the current forward curve level. The second factor in the model is a quantity analogous to the stochastic convenience yield, which accounts for the random changes in the forward curve shape. The well-known cost-of-carry relationship is significantly improved by introducing a deterministic seasonal premium within the convenience yield. We develop model estimation procedures and apply them to a number of energy markets.

Jumps and stochastic volatility in crude oil prices and advances in average option pricing

“…For commodities prone to such fluctuations, the shape of the forward curve is determined by the expectations regarding the seasonal demand and supply dynamics; the crude oil market is a world market where seasonality is not observed in the term structure of futures prices (Borovkova and Geman 2006). For example, heating oil (gasoline) exhibits a relative upward pressure during the winter (summer) months and the storage capacity may not always be able to absorb the seasonal demand shocks, especially during the period of peak demand; hence, higher prices are anticipated in winter (summer), and lower prices during the inventory-accumulation period in summer (winter).…”

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

“…2 A statistical study on the seasonal variability of energy commodity prices can be found in Manoliu and Tompaidis (2002), Borovkova and Geman (2006), Geman and Ohana (2009), among others. While not directly relevant for the pricing of options on (commodity) futures (as pointed out by ), a deterministic seasonal component may impact on model estimation (as pointed out by Lo and Wang (1995) and ), and hence indirectly on option prices.…”

Revisiting uncertainty and price forecast indicators in corn and wheat markets

“…The seasonal cost-of-carry model for commodity forward curves developed by Borovkova and Geman (2006) introduces the geometric average of the forward prices as an alternative to the spot price for the first state variable when managing a portfolio of seasonal or non-seasonal commodity Futures:…”

“…Two other points are worth noting: first, if the N months encompass an integer number of calendar years, is a measure that is, by construction, devoid of seasonality, as proposed by Borovkova and Geman (2006), who study seasonal energy commodities such as natural gas and heating oil. Second, in our setting, it seems reasonable to expect that the whole forward curve contains more information to build estimators of future spot prices than an individual Futures contract.…”

“…In the second part of the paper, we compare the quality of future price prediction provided by individual forward contracts versus the geometric average of the forward curve introduced in Borovkova and Geman (2006). We show that the latter performs better for corn and wheat spot prices.…”