Commodity Forward Curve Dynamics with Inventory Information
38 Pages Posted: 18 Mar 2015
Date Written: March 17, 2015
In this paper we introduce a new two-factor commodity term structure model for which inventories serve as a second state variable. We derive a closed-form formula for futures prices and empirically analyze the model's properties. Besides being economically appealing, our model also outperforms the well-known Gibson and Schwartz (1990) model in terms of hedging abilities.
Keywords: Commodities, theory of storage, forward curve dynamics, crude oil, futures markets, hedging, inventory, convenience yield
JEL Classification: G13, C50, Q40
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