A multi-factor model for improved commodity pricing: Calibration and an application to the oil market

Luca Vincenzo Ballestra and Christian Tezza

Papers from arXiv.org

Abstract: We present a new model for commodity pricing that enhances accuracy by integrating four distinct risk factors: spot price, stochastic volatility, convenience yield, and stochastic interest rates. While the influence of these four variables on commodity futures prices is well recognized, their combined effect has not been addressed in the existing literature. We fill this gap by proposing a model that effectively captures key stylized facts including a dynamic correlation structure and time-varying risk premiums. Using a Kalman filter-based framework, we achieve simultaneous estimation of parameters while filtering state variables through the joint term structure of futures prices and bond yields. We perform an empirical analysis focusing on crude oil futures, where we benchmark our model against established approaches. The results demonstrate that the proposed four-factor model effectively captures the complexities of futures term structures and outperforms existing models.

Date: 2025-01
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2501.15596 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:2501.15596

Access Statistics for this paper

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