Analyzing Commodity Futures Using Factor State-Space Models with Wishart Stochastic Volatility

42 Pages Posted: 23 Aug 2019

See all articles by Tore Selland Kleppe

Tore Selland Kleppe

University of Stavanger

Roman Liesenfeld

University of Cologne, Department of Economics

Guilherme V. Moura

Universidade Federal de Santa Catarina (UFSC) - Department of Economics

Atle Oglend

University of Stavanger

Date Written: August 20, 2019

Abstract

We propose a factor state-space approach with stochastic volatility to model and forecast the term structure of future contracts on commodities. Our approach builds upon the dynamic 3-factor Nelson-Siegel model and its 4-factor Svensson extension and assumes for the latent level, slope and curvature factors a Gaussian vector autoregression with a multivariate Wishart stochastic volatility process. Exploiting the conjugacy of the Wishart and the Gaussian distribution, we develop a computationally fast and easy to implement MCMC algorithm for the Bayesian posterior analysis.

An empirical application to daily prices for contracts on crude oil with stipulated delivery dates ranging from one to 24 months ahead show that the estimated 4-factor Svensson model with two curvature factors provides a good parsimonious representation of the serial correlation in the individual prices and their volatility. It also shows that this model has a good out-of-sample forecast performance.

Keywords: Commodities, Bayesian inference, Dynamic Nelson-Siegel model, State space model, Wishart stochastic volatility

JEL Classification: C32, C38, C51, C58, G13, Q02

Suggested Citation

Kleppe, Tore Selland and Liesenfeld, Roman and Moura, Guilherme Valle and Oglend, Atle, Analyzing Commodity Futures Using Factor State-Space Models with Wishart Stochastic Volatility (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3441097 or http://dx.doi.org/10.2139/ssrn.3441097

Tore Selland Kleppe

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Roman Liesenfeld (Contact Author)

University of Cologne, Department of Economics ( email )

Albertus-Magnus-Platz
D-50931 Köln
Germany

Guilherme Valle Moura

Universidade Federal de Santa Catarina (UFSC) - Department of Economics ( email )

PO Box 476
Florianopolis, SC 88010-970
Brazil

Atle Oglend

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

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