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Contribution Details

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
  • Erich Walter Farkas
  • Elise Gourier
  • Robert Huitema
  • Ciprian Necula
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
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.
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Digital Object Identifier 10.1016/j.jbankfin.2017.01.007
Other Identification Number merlin-id:14476
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