Modeling Commodity Price Dynamics

David Lee

Working Papers from HAL

Abstract: The random component of commodity future prices can be generally broken down into major contributors or factors. These are known as principal components. In this paper, we present a multifactor framework for modeling commodity price dynamics. We develop a generic procedure for the model calibration. The calibration procedure consists of an offline step and an online step. Empirical and numeric study shows that the model prices fluctuate randomly around the market prices, indicating prima facie that the model performs quite well.

Keywords: commodity derivatives; multiple factor model; model calibration; volatility skew (search for similar items in EconPapers)
Date: 2022-08-22
Note: View the original document on HAL open archive server: https://hal.science/hal-03758093
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