Valuation of commodity derivatives with an unobservable convenience yield

Anh Lai and Constantin Mellios
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Constantin Mellios: PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne

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Abstract: This paper extends the existing literature on commodity derivatives to account for an unobservable stochastic convenience yield. Investors operate in an economy with incomplete information. In contrast to other incomplete information models, analytical formulas for forward and futures prices, as well as for European options on forward and futures contracts are obtained. These formulas reveal the important role played by the initial values of the estimator of the convenience yield and of the estimation error respectively when valuing commodity derivatives. We estimate Schwartz׳s [11] model and the incomplete information model based on the discrete-time Kalman filtering method. For futures prices, the latter seems to perform better than the former. Moreover, Schwartz׳s model provides higher option prices than the incomplete information model. The most important differences are obtained for higher futures prices and for longer options maturities.

Keywords: unobservable variables; incomplete information; Commodity spot prices; futures prices; option prices; convenience yield; interest rates (search for similar items in EconPapers)
Date: 2016-02
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01183166
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Citations: View citations in EconPapers (6)

Published in Computers and Operations Research, 2016, 66, pp.402-414. ⟨10.1016/j.cor.2015.03.007⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01183166

DOI: 10.1016/j.cor.2015.03.007

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