Multi-Factor Function-on-Function Regression of Bond Yields on WTI Commodity Futures Term Structure Dynamics

Peilun He, Gareth W. Peters, Nino Kordzakhia and Pavel V. Shevchenko

Papers from arXiv.org

Abstract: In the analysis of commodity futures, it is commonly assumed that futures prices are driven by two latent factors: short-term fluctuations and long-term equilibrium price levels. In this study, we extend this framework by introducing a novel state-space functional regression model that incorporates yield curve dynamics. Our model offers a distinct advantage in capturing the interdependencies between commodity futures and the yield curve. Through a comprehensive empirical analysis of WTI crude oil futures, using US Treasury yields as a functional predictor, we demonstrate the superior accuracy of the functional regression model compared to the Schwartz-Smith two-factor model, particularly in estimating the short-end of the futures curve. Additionally, we conduct a stress testing analysis to examine the impact of both temporary and permanent shocks to US Treasury yields on futures price estimation.

Date: 2024-12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2412.05889 Latest version (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:arx:papers:2412.05889

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().