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Empirical Performance of Commodity Pricing Models: When is it Worthwhile to Use a Stochastic Volatility Specification?

Gonzalo Cortazar, Simon Gutierrez and Hector Ortega

Journal of Futures Markets, 2016, vol. 36, issue 5, 457-487

Abstract: We compare the empirical pricing performance of three models: a constant volatility model, a two‐factor stochastic volatility model, and a one‐factor stochastic volatility model with a model‐free implied variance specification. Results of applying these models to oil, copper, and gold derivatives are consistent for all commodities and highlight the relative benefits of the different models implying that in choosing the best model to implement in a real situation, careful consideration must be given to the tradeoffs between effort and precision. We believe our results are not only new, but also relevant for practitioners. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:457–487, 2016

Date: 2016
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