Multi-Factor Stochastic Model and Estimation Procedure for the Valuation and Hedging of Commodity Contingent Claims
30 Pages Posted: 7 Dec 2003
Date Written: March 2003
In this paper we provide a new multi-factor stochastic model of commodity futures prices and propose a Kalman filter estimation procedure that may be applied to a panel data with missing observations. This model may be used to implement financial engineering applications which require the valuation or hedging of commodity-linked assets. We calibrate our model using daily oil futures prices and analyze its goodness-of-fit to observed prices and empirical volatilities.
Keywords: Financial Engineering, Risk Management, Natural Resources, Economic Modelling, Kalman Filter
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