A Partial Equilibrium Model of the Convenience Yield Risk Premium of Storable Commodities

Vincent Lacoste and Pierre Six
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Vincent Lacoste: Neoma Business School
Pierre Six: Neoma Business School

Bankers, Markets & Investors, 2014, issue 130, 24-40

Abstract: This paper develops a partial equilibrium model of the convenience yield risk premium when commodities are storable. Contrary to the previous literature, the risk premium is computed explicitly and endogenously. We provide a decomposition of the convenience yield risk premium in terms of the volatility of the convenience yield as well as in terms of the sensitivity of the marginal utility of investors to the movements of the convenience yield. This decomposition enables us to assess the impact of the risk aversion and investment horizon of investors on the futures contracts’ basis and on the term structure of volatility. Our illustrations are carried out in the case of copper, gold, and oil markets.

Keywords: Convenience Yield Risk Premium; Commodity Futures Markets; Commodity Risk Management; Commodity Derivatives Pricing; Samuelson Effect; Commodity Futures Basis; Risk Aversion (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2014
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