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A partial equilibrium model for the convenience yield risk premium

Sami Attaoui, Vincent Lacoste and Pierre Six
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Vincent Lacoste: Pôle Finance Responsable - Rouen Business School - Rouen Business School
Pierre Six: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: This papers develops a partial equilibrium model of the convenience yield risk premium. Contrary to the previous literature, the risk premium is computed explicitely and endogenously. We provide a decomposition of the convenience yield risk premium in terms of the volatility of the convenience yield as well as in terms of the sensitivity of the marginal utility of investors to the movements of the convenience yield. This decomposition enables us to assess the impact of the risk aversion and investment horizon of investors on the futures contracts' basis and on the term structure of volatility for our illustration carried out in the case of the copper market.

Keywords: convenience yield risk premium; commodity futures markets; commodity risk management; commodity derivatives pricing; Samuelson effect; commodity futures basis; risk aversion.; risk aversion (search for similar items in EconPapers)
Date: 2011-04-13
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Published in Eastern Finance Association Annual Meeting, Apr 2011, Savannah, Georgia, United States

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