Seasonal Stochastic Volatility and the Samuelson Effect in Agricultural Futures Markets

36 Pages Posted: 20 Jun 2015 Last revised: 21 Nov 2018

See all articles by Lorenz Schneider

Lorenz Schneider

EMLYON Business School

Bertrand Tavin

emlyon business school

Date Written: November 20, 2018

Abstract

We introduce a multi-factor stochastic volatility model for commodities that incorporates seasonality and the Samuelson effect. Conditions on the seasonal term under which the corresponding volatility factor is well-defined are given, and five different specifications of the seasonality pattern are proposed. We calculate the joint characteristic function of two futures prices for different maturities in the risk-neutral measure. The model is then presented under the physical measure, and its state-space representation is derived, in order to estimate the parameters with the Kalman filter for time series of corn, cotton, soybean, sugar and wheat futures from 2007 to 2017. The seasonal model significantly outperforms the nested non-seasonal model in all five markets, and we show which seasonality patterns are particularly well-suited in each case. We also confirm the importance of correctly modelling the Samuelson effect in order to account for futures with different maturities. Our results are clearly confirmed in a robustness check carried out with an alternative dataset of constant maturity futures for the same agricultural markets.

Keywords: Agricultural Commodities, Seasonal Commodities, Seasonal Volatility, Stochastic Volatility, Samuelson Effect, Time-Series Estimation, Kalman Filter

JEL Classification: C63, C51, C52, G13

Suggested Citation

Schneider, Lorenz and Tavin, Bertrand, Seasonal Stochastic Volatility and the Samuelson Effect in Agricultural Futures Markets (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=2620584 or http://dx.doi.org/10.2139/ssrn.2620584

Lorenz Schneider

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Bertrand Tavin (Contact Author)

emlyon business school ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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