EconPapers    
Economics at your fingertips  
 

Equilibrium Forward Curves for Commodities

Bryan Routledge (), Duane Seppi and Chester Spatt

No 1997-50, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We develop an equilibrium model of the term structure of forward prices for commodities. Our approach differs from Brennan (1991) and Schwartz (1997) and other two-factor approaches in that we do not assume an exogenous "convenience yield" process as a second factor in forward prices. Rather, we view the spot commodity as having an embedded timing option that is absent in a forward contract. The value of this timing option arises from a non- negativity constraint on inventory. The value changes over time as a function of both the endogenous inventory level and exogenous shocks to supply and demand. In contrast to the two-factor models, our model exhibits a state dependent correlation between spot prices and convenience yields. We also use our model to understand the relation among the volatilities of forward prices at different horizons. We show how conditional violations of the Samuelson effect can occur. We also address the related issue of dynamically trading a near-dated forward contract to hedge a long- dated position. Finally, our model is adapted to incorporate seasonalities in commodity demand and production.

New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://sulawesi.tepper.cmu.edu/papers/Eq_forward/index.html

Related works:
Journal Article: Equilibrium Forward Curves for Commodities (2000) Downloads
Working Paper: Equilibrium Forward Curves for Commodities Downloads
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:cmu:gsiawp:55

Ordering information: This working paper can be ordered from
http://student-3k.te ... /gsiadoc/GSIA_WP.asp

Access Statistics for this paper

More papers in GSIA Working Papers from Carnegie Mellon University, Tepper School of Business Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890.
Bibliographic data for series maintained by Steve Spear ().

 
Page updated 2018-11-30
Handle: RePEc:cmu:gsiawp:55