FROM CALENDAR TIME TO BUSINESS TIME: THE CASE OF COMMODITY MARKETS

Sergiy Ladokhin, Maren Diane Schmeck and Svetlana Borovkova
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Sergiy Ladokhin: Vrije Universiteit, De Boelelaan 1105, 1081 HV Amsterdam, Netherlands
Maren Diane Schmeck: ��Center for Mathematical Economics, Bielefeld University, Universitätsstraße 25, 33615 Bielefeld, Germany
Svetlana Borovkova: Vrije Universiteit, De Boelelaan 1105, 1081 HV Amsterdam, Netherlands

International Journal of Theoretical and Applied Finance (IJTAF), 2024, vol. 27, issue 05n06, 1-37

Abstract: We address the problem of modeling commodity forward curves, while preserving empirical features observed in commodity markets. By letting a commodity market to “live†in the tempo of a business rather than calendar clock, we create a model with a rich but realistic set of features, such as stochastic volatility, stochastic rate of mean reversion and various shapes of forward curves such as backwardation and contango.The model, when applied to extensive historical datasets of crude oil and natural gas forward curves, shows a remarkably good fit to the observed futures prices, also in periods of high volatility and negative prices.The model is developed in such a way that it can be used for a wide variety of applications, ranging from exotic derivatives pricing to risk management of commodity portfolios.

Keywords: Commodity futures; forward curve; stochastic time change; activity rate; activity bond (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219024924500183

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