Long and Short Term Jumps in Commodity Futures Prices

52 Pages Posted: 27 Mar 2008 Last revised: 15 Dec 2010

See all articles by M. A. H. Dempster

M. A. H. Dempster

University of Cambridge - Centre for Financial Research; Cambridge Systems Associates Limited; University of Cambridge - Judge Business School

Elena Medova

University of Cambridge - Centre for Financial Research; Cambridge Systems Associates Limited

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Date Written: March 4, 2008

Abstract

This paper analyzes long- and short- term jumps in commodity futures from the statistical and economic perspectives. First we show that both commodity futures returns and convenience yields are strongly leptokurtic. Thus, we propose a non-Gaussian model by adding jumps to the Schwartz-Smith (2000) model of commodity futures. Long term (permanent) and short term (transitory) jumps are modeled differently. Thirdly, we propose a new state space form to calibrate the model. Estimates of jump arrival times indicate that both surprising important information and market activities generate jumps of different intensities. Finally, as an application of our model we show that jumps are important for pricing options on commodity futures.

Keywords: commodity futures, convenience yields, jumps, non-Gaussian state space models, extended Kalman …lter, importance sampling

JEL Classification: G13

Suggested Citation

Dempster, M. A. H. and Medova, Elena and Tang, Ke, Long and Short Term Jumps in Commodity Futures Prices (March 4, 2008). Available at SSRN: https://ssrn.com/abstract=1107966 or http://dx.doi.org/10.2139/ssrn.1107966

M. A. H. Dempster (Contact Author)

University of Cambridge - Centre for Financial Research ( email )

Centre for Mathematical Sciences
Wilberforce Road
Cambridge, CB3 0WA
United Kingdom

Cambridge Systems Associates Limited ( email )

5-7 Portugal Place
Cambridge, CB5 8AF
United Kingdom

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Elena Medova

University of Cambridge - Centre for Financial Research ( email )

Centre for Mathematical Sciences
Wilberforce Road
Cambridge, CB3 0WA
United Kingdom

Cambridge Systems Associates Limited ( email )

5-7 Portugal Place
Cambridge, CB5 8AF
United Kingdom

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China
13466777332 (Phone)

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