A Stochastic Factor Model for Risk Management of Commodity Derivatives

Zi-Yi Guo ()
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Zi-Yi Guo: Wells Fargo Bank, N.A.

No 4507452, Proceedings of Economics and Finance Conferences from International Institute of Social and Economic Sciences

Abstract: In the last two years, the world crude oil prices have dropped dramatically, and consequently the oil market has become very volatile and risky. Since energy markets play very important roles in the international economy and have led several global economic crises, risk management of energy products prices becomes very important for both academicians and market participants. We apply Schwartz and Smith?s model (2000) to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts. The model includes a long-term factor and a short-term factor. We show that the two factors explain the Samuelson effect well and the model present well goodness of fit. Our backtesting results demonstrate that the models provide satisfactory risk measures for listed crude oil futures contracts. A simple estimation method possessing quick convergence is developed.

Keywords: Factor model; Samuelson effect; value-at-risk; least square estimation. (search for similar items in EconPapers)
JEL-codes: C58 G13 G32 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2017-04
New Economics Papers: this item is included in nep-ene and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Proceedings of the Proceedings of the 7th Economics & Finance Conference, Tel Aviv, Apr 2017, pages 26-42

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Persistent link: https://EconPapers.repec.org/RePEc:sek:iefpro:4507452

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