On the Pricing of Storable Commodities

Dorje C. Brody, Lane P. Hughston and Xun Yang

Chapter 17 in Financial Informatics:An Information-Based Approach to Asset Pricing, 2022, pp 393-404 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper introduces an information-based model for the pricing of storable commodities such as crude oil and natural gas. The model uses the concept of market information about future supply and demand as a basis for valuation. Physical ownership of a commodity is taken to provide a stream of convenience dividends equivalent to a continuous cash flow. The market filtration is assumed to be generated jointly by the following: (i) current and past levels of the dividend rate, and (ii) partial information concerning the future of the dividend flow. The price of a commodity is the expectation under a suitable pricing measure of the totality of the discounted risk-adjusted future convenience dividend, conditional on the information provided by the market filtration. In the situation where the dividend rate is modelled by an Ornstein—Uhlenbeck process, the prices of options on commodities can be derived in closed form. The approach that we present can be applied to other assets that yield potentially negative effective cash flows, such as real estate, factories, refineries, mines, and power generating plants.

Keywords: Financial Mathematics; Mathematical Finance; Financial Markets; Informatics; Asset Pricing; Asset Price Dynamics; Stochastic Modelling; Information Process; Information Flow; Signal Processing; Filtration; Brownian Motion; Brownian Bridge; Change of Measure; Stochastic Volatility; Credit Risk; Default; Equities; Bonds; Collateralized Debt Obligation; Discount Bond; Lévy Process; Lévy Random Bridge; Lévy Information; Gamma Bridge; Markov Bridge; Pricing Kernel; Option Pricing; Informed Traders; Insurance; Reinsurance; Insurance Claims; Bond Portfolio; Heat Kernel; Markov Process; Variance Gamma Process; Ornstein-Uhlenbeck Process; Commodities; Fake News (search for similar items in EconPapers)
JEL-codes: C02 C6 G12 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789811246494_0017 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789811246494_0017 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789811246494_0017

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().