Modelling the general dependence between commodity forward curves

Mikhail Zolotko and Ostap Okhrin

Energy Economics, 2014, vol. 43, issue C, 284-296

Abstract: This study proposes a novel framework for the joint modelling of commodity forward curves. Its key contribution is twofold. First, we introduce a family of dynamic conditional correlation models based on hierarchical Archimedean copulae (HAC-DCC), which are flexible but parsimonious instruments that capture a wide range of dynamic dependencies. Second, we apply these models in the context of commodity forward curves as part of the framework. An extensive Value-at-Risk analysis shows that certain HAC-DCC models consistently outperform other introduced benchmarks in terms of the preciseness of their out-of-sample distribution forecasts of the returns of various commodity futures portfolios. This shows that the proposed modelling framework, as one of its possible applications, can be a useful and convenient risk management tool.

Keywords: Commodity forward curves; Multivariate GARCH; Hierarchical Archimedean copula; Value-at-risk (search for similar items in EconPapers)
JEL-codes: C13 C53 Q40 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:43:y:2014:i:c:p:284-296

DOI: 10.1016/j.eneco.2014.02.019

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