Post by Nakajima Ohashi on Aug 13, 2009 0:03:07 GMT 4
Cointegrated Commodity Pricing Model
Katsushi Nakajima
Hitotsubashi University - Graduate School of International Corporate Strategy
Kazuhiko Ohashi
Hitotsubashi University - Graduate School of International Corporate Strategy
July 15, 2009
Abstract:
In this paper, we propose a commodity pricing model that extends Gibson-Schwartz two-factor model to incorporate the effect of linear relations among commodity prices, which include co-integration under certain conditions. We derive futures and call option pricing formulae, and show that unlike Duan and Pliska (2004), the linear relations among commodity prices, or the error correction term, should affect the commodity derivative prices even if volatilities of commodity returns are constant. Using crude oil and heating oil market data, we estimate the proposed model. The result suggests that the error correction between these commodity prices partly explains the deviation of drifts from risk-free rate, which has been treated as "convenience" yield in preceding models, in commodity returns, and hence affects their derivative prices empirically.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1437490_code108433.pdf?abstractid=1437490&mirid=4
Katsushi Nakajima
Hitotsubashi University - Graduate School of International Corporate Strategy
Kazuhiko Ohashi
Hitotsubashi University - Graduate School of International Corporate Strategy
July 15, 2009
Abstract:
In this paper, we propose a commodity pricing model that extends Gibson-Schwartz two-factor model to incorporate the effect of linear relations among commodity prices, which include co-integration under certain conditions. We derive futures and call option pricing formulae, and show that unlike Duan and Pliska (2004), the linear relations among commodity prices, or the error correction term, should affect the commodity derivative prices even if volatilities of commodity returns are constant. Using crude oil and heating oil market data, we estimate the proposed model. The result suggests that the error correction between these commodity prices partly explains the deviation of drifts from risk-free rate, which has been treated as "convenience" yield in preceding models, in commodity returns, and hence affects their derivative prices empirically.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1437490_code108433.pdf?abstractid=1437490&mirid=4