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Type | Journal Article |
Scope | Discipline-based scholarship |
Title | A Two-Factor Cointegrated Commodity Price Model with an Application to Spread Option Pricing |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
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Journal Title | Journal of Banking and Finance |
Publisher | Elsevier |
Geographical Reach | international |
ISSN | 0378-4266 |
Volume | 77 |
Page Range | 249 - 268 |
Date | 2017 |
Abstract Text | In this paper, we propose an easy-to-use yet comprehensive model for a system of cointegrated commodity prices. While retaining the exponential affine structure of previous approaches, our model allows for an arbitrary number of cointegration relationships. We show that the cointegration component allows capturing well-known features of commodity prices, i.e., upward sloping (contango) and downward sloping (backwardation) term-structures, smaller volatilities for longer maturities and an upward sloping correlation term structure. The model is calibrated to futures price data of ten commodities. The results provide compelling evidence of cointegration in the data. Implications for the prices of futures and options written on common commodity spreads (e.g., spark spread and crack spread) are thoroughly investigated. |
Free access at | Related URL |
Related URLs | |
Digital Object Identifier | 10.1016/j.jbankfin.2017.01.007 |
Other Identification Number | merlin-id:14476 |
PDF File | Download from ZORA |
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