A Partial Equilibrium Model for the Convenience Yield Risk Premium
27 Pages Posted: 17 Sep 2010 Last revised: 23 May 2011
Date Written: May 19, 2011
This papers develops a partial equilibrium model of the convenience yield risk premium. Contrary to the previous literature, the risk premium is computed explicitely and endogenously. We provide a decomposition of the convenience yield risk premium in terms of the volatility of the convenience yield as well as in terms of the sensitivity of the marginal utility of investors to the movements of the convenience yield. This decomposition enables us to assess the impact of the risk aversion and investment horizon of investors on the futures contracts’ basis and on the term structure of volatility for our illustration carried out in the case of the copper market.
Keywords: Convenience Yield, Risk Premium, Commodity Futures Markets, Commodity Risk Management, Commodity Derivatives Pricing, Samuelson Effect
JEL Classification: G13
Suggested Citation: Suggested Citation