A Preference-Free Formula to Value Commodity Derivatives

J.C. Rodriguez

Research output: Working paperDiscussion paperOther research output

Abstract

This paper studies a new model of commodity prices in which the stochastic convenience yield is an affine function of past commodity returns. While preserving market completeness, the model exhibits price nonstationarity and mean reversion under the martingale measure, and, as a consequence, it is able to fit a slowly de- caying term structure of futures return volatilities. The model nests mean reversion in levels and geometric Brownian motion, and renders preference-free formulas for the prices of futures contracts and European options.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume2007-92
Publication statusPublished - 2007

Publication series

NameCentER Discussion Paper
Volume2007-92

Keywords

  • Commodity
  • Derivatives
  • Mean Reversion

Fingerprint Dive into the research topics of 'A Preference-Free Formula to Value Commodity Derivatives'. Together they form a unique fingerprint.

Cite this