The interest rate factor in commodity markets

Haicheng Shu

Quantitative Finance, 2021, vol. 21, issue 12, 2103-2118

Abstract: This paper proposes a joint affine term structure model for multiple commodity future contracts. We use latent variables as factors to find one common to the oil, corn, copper and gold markets. This common factor behaves like an interest rate, influencing futures prices through the cost of carry, and is consistent with the theory of storage. It approximates, but nevertheless significantly differs from, the US federal funds rate. Introducing it into a model that includes the federal funds rate significantly improves the fit of the joint affine commodity term structure model.

Date: 2021
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DOI: 10.1080/14697688.2020.1819553

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