Can Gaussian factor models of commodity prices capture the financialization phenomenon?

Fernando Antonio Aiube () and Winicius Botelho Faquieri

The North American Journal of Economics and Finance, 2019, vol. 50, issue C

Abstract: In this paper we investigate whether Gaussian factor models can capture the financialization of commodity markets. The use of convenience yield as a stochastic factor is a common practice in the literature. This variable reflects the behavior of producers and physical traders. On the other hand, the great presence of financial traders during the financialization period could make the convenience yield factor less relevant for modeling the term structure of future prices. We find that the inclusion of the convenience yield as a second factor during the financialization improves the fit to empirical data. Hence, in the class of Gaussian factor models the convenience yield has a prominent role even in the financialization context.

Keywords: Gaussian factor models; Commodity prices; Financialization of commodities (search for similar items in EconPapers)
JEL-codes: C02 G13 Q02 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:50:y:2019:i:c:s1062940819300117

DOI: 10.1016/j.najef.2019.101028

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