Factor‐augmented Bayesian cointegration models: a case‐study on the soybean crush spread

Maciej Marowka, Gareth Peters (), Nikolas Kantas and Guillaume Bagnarosa ()
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Maciej Marowka: Imperial College London
Gareth Peters: HWU - Heriot-Watt University [Edinburgh]
Nikolas Kantas: Imperial College London
Guillaume Bagnarosa: ESC [Rennes] - ESC Rennes School of Business

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Abstract: We investigate how vector auto-regressive models can be used to study the soybean crush spread. By crush spread we mean a time series marking the difference between a weighted combination of the value of soymeal and soyoil to the value of the original soybeans. Commodity industry practitioners often use fixed prescribed values for these weights, which do not take into account any time-varying effects or any financial-market-based dynamic features that can be discerned from futures price data. We address this issue by proposing an appropriate time series model with cointegration. Our model consists of an extension of a particular vector auto-regressive model that is used widely in econometrics. Our extensions are inspired by the problem at hand and allow for a time-varying covariance structure and a time-varying intercept to account for seasonality. To perform Bayesian inference we design an efficient Markov chain Monte Carlo algorithm, which is based on the approach of Koop and his co-workerss. Our investigations on prices obtained from futures contracts data confirmed that the added features in our model are useful in reliable statistical determination of the crush spread. Although the interest here is on the soybean crush spread, our approach is applicable also to other tradable spreads such as oil and energy-based crack and spark spreads.

Keywords: Bayesian inference; Markov chain Monte Carlo methods; Soybean crush spread; State space models with cointegration (search for similar items in EconPapers)
Date: 2020-01-07
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Citations: View citations in EconPapers (3)

Published in Journal of the Royal Statistical Society: Series C Applied Statistics, 2020, 69 (2), pp.483-500. ⟨10.1111/rssc.12395⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02780193

DOI: 10.1111/rssc.12395

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