Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans
45 Pages Posted: 27 Feb 2002
We estimate a continuous-time stochastic volatility model using panel data of soybean futures and options on soybean futures. The model of commodity price dynamics is within the class of so-called affine asset pricing models, and option prices are determined using a standard inversion of characteristic functions approach.
Our modeling acknowledges that commodities exhibit seasonality patterns in both spot price level and volatility and, hence, the involved commodity dynamics involve stochastic differential equations that are inhomogeneous in time. The estimation method is based on a state space formulation of the model and a quasi maximum likelihood approach.
Estimation results are obtained based on weekly observations of soybean futures prices and options prices from the Chicago Board of Trade in the period October 1984 to March 1999. Our empirical results support the conceptual ideas in the theory of storage, though not the view that convenience yields are like timing options.
JEL Classification: G13, C00
Suggested Citation: Suggested Citation