Commodity Derivatives Valuation with Autoregressive and Moving Average Components in the Price Dynamics

36 Pages Posted: 22 Jul 2009 Last revised: 26 Apr 2012

See all articles by Raphael Paschke

Raphael Paschke

University of Mannheim - Department of Business Administration and Finance

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: March 14, 2010

Abstract

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.

Keywords: Commodity Pricing, CARMA, Futures, Crude Oil

JEL Classification: G13, C50, Q40

Suggested Citation

Paschke, Raphael and Prokopczuk, Marcel, Commodity Derivatives Valuation with Autoregressive and Moving Average Components in the Price Dynamics (March 14, 2010). Journal of Banking and Finance, Vol. 34, No. 11, 2010, Available at SSRN: https://ssrn.com/abstract=1437529 or http://dx.doi.org/10.2139/ssrn.1437529

Raphael Paschke

University of Mannheim - Department of Business Administration and Finance ( email )

D-68131 Mannheim
Germany

Marcel Prokopczuk (Contact Author)

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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