Commodity derivatives pricing with inventory effects

Christian Bach () and Matt Dziubinski
Additional contact information
Christian Bach: Aarhus University and CREATES, Postal: Bartholins Allé 10, 8000 Aarhus C, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We introduce tractable models for commodity derivatives pricing with inventory and volatility effects, and illustrate with applications to the oil market. We contribute to the existing literature in several respects. First, whereas the previous literature uses futures data for investigating the relationship between inventory and volatility, we use the information available in options traded on futures. Second, performance assessment in the previous literature has primarily evolved around explaining moments of data or forecasting prices of futures. Instead, we assess the performance of our model by considering both the ability of explaining prices in-sample and out-of-sample - assessing both the pricing-performance and the hedging-performance of the models. Third, we model the futures surface rather than the spot price process, and from the no-arbitrage relationship between spot and futures prices we limit the number of parameters to calibrate. We introduce a new, maturity-wise calibration method compatible with this modeling methodology. Fourth, we use actual data on inventories rather than a proxy. Fifth, our model is very flexible and allows for testing several different types of relationships between inventory and volatility.

Keywords: Energy futures and options markets; energy price volatility; commodities; crude oil; stochastic volatility; stochastic inventories; inventories; option pricing; scarcity. (search for similar items in EconPapers)
JEL-codes: C51 C52 G12 G13 Q40 (search for similar items in EconPapers)
Pages: 70
Date: 2012-02-07
New Economics Papers: this item is included in nep-ene
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/12/rp12_06.pdf (application/pdf)

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:aah:create:2012-06

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().