No-arbitrage conditions for storable commodities and the modeling of futures term structures

Liu, Peng (Peter) and Ke Tang

Journal of Banking & Finance, 2010, vol. 34, issue 7, 1675-1687

Abstract: One distinguishable feature of storable commodities is that they relate to two markets: cash market and storage market. This paper proves that, if no arbitrage exists in the storage-cash dual markets, the commodity convenience yield has to be non-negative. However, classical reduced-form models for futures term structures could allow serious arbitrages due to the high volatility of the convenience yield. To avoid negative convenience yield, this paper proposes a semi-affine arbitrage-free model, which prices futures analytically and fits futures term structures reasonably well. Importantly, our model prices commodity-related contingent claims (such as calendar spread options) quite differently with classical models.

Keywords: No-arbitrage; condition; Exponential; affine; model; Convenience; yield; Kalman; filter (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:7:p:1675-1687

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