Integrating multiple commodities in a model of stochastic price dynamics

Raphael Paschke and Marcel Prokopczuk

Journal of Energy Markets

Abstract: ABSTRACT In this paper we develop a multi-factor model for the joint dynamics of related commodity spot prices in continuous time. We contribute to the existing literature by simultaneously considering various commodity markets in a single, consistent model and, through its application, demonstrate the economic significance of our approach. Employing an essential affine model structure, we allow for rich dependencies among the latent factors and, thus, the commodity prices. The cointegrated behavior of the different spot price dynamics is explicitly taken into account.We apply the Kalman filter methodology to estimate the model for crude oil, heating oil and gasoline futures contracts. Empirically, we are able to identify a common non-stationary equilibrium factor, driving the long-term price behavior, and stationary factors affecting all three markets in a common way. Additionally, we identify factors that only impact on subsets of the commodities considered. To demonstrate the economic consequences of our integrated approach, we evaluate the investment in a refinery from a financial management perspective and compare the results with an approach neglecting the co-movement of prices. This negligence leads to radical changes in the project's assessment.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-energy-markets/216 ... astic-price-dynamics (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ2:2160795

Access Statistics for this article

More articles in Journal of Energy Markets from Journal of Energy Markets
Bibliographic data for series maintained by Thomas Paine ().