Commodity Derivatives Valuation with Autoregressive and Moving Average Components in the Price Dynamics
University of Mannheim - Department of Business Administration and Finance
Zeppelin University - Institute of Corporate Management & Economics; University of Reading - Henley Business School - ICMA Centre
March 14, 2010
Journal of Banking and Finance, Vol. 34, No. 11, 2010
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 futures market. We 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.
Number of Pages in PDF File: 36
Keywords: Commodity Pricing, CARMA, Futures, Crude Oil
JEL Classification: G13, C50, Q40Accepted Paper Series
Date posted: July 22, 2009 ; Last revised: April 26, 2012
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