A Preference-Free Formula to Value Commodity Derivatives

J.C. Rodriguez

Research output: Working paperDiscussion paperOther research output

330 Downloads (Pure)

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

Fingerprint

Derivatives
Commodities
Mean reversion
Martingale measure
Convenience yield
Nonstationarity
Futures contracts
Geometric Brownian motion
Commodity prices
Market completeness
European options
Term structure
Return volatility

Keywords

  • Commodity
  • Derivatives
  • Mean Reversion

Cite this

Rodriguez, J. C. (2007). A Preference-Free Formula to Value Commodity Derivatives. (CentER Discussion Paper; Vol. 2007-92). Tilburg: Finance.
Rodriguez, J.C. / A Preference-Free Formula to Value Commodity Derivatives. Tilburg : Finance, 2007. (CentER Discussion Paper).
@techreport{7354a9fa320240c1aeb2adb17d5abcc7,
title = "A Preference-Free Formula to Value Commodity Derivatives",
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.",
keywords = "Commodity, Derivatives, Mean Reversion",
author = "J.C. Rodriguez",
note = "Pagination: 31",
year = "2007",
language = "English",
volume = "2007-92",
series = "CentER Discussion Paper",
publisher = "Finance",
type = "WorkingPaper",
institution = "Finance",

}

Rodriguez, JC 2007 'A Preference-Free Formula to Value Commodity Derivatives' CentER Discussion Paper, vol. 2007-92, Finance, Tilburg.

A Preference-Free Formula to Value Commodity Derivatives. / Rodriguez, J.C.

Tilburg : Finance, 2007. (CentER Discussion Paper; Vol. 2007-92).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - A Preference-Free Formula to Value Commodity Derivatives

AU - Rodriguez, J.C.

N1 - Pagination: 31

PY - 2007

Y1 - 2007

N2 - 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.

AB - 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.

KW - Commodity

KW - Derivatives

KW - Mean Reversion

M3 - Discussion paper

VL - 2007-92

T3 - CentER Discussion Paper

BT - A Preference-Free Formula to Value Commodity Derivatives

PB - Finance

CY - Tilburg

ER -

Rodriguez JC. A Preference-Free Formula to Value Commodity Derivatives. Tilburg: Finance. 2007. (CentER Discussion Paper).