Co-integrated Commodity Forward Pricing Model

Munoz Lucie (), Boudet Florian (), Galano Victoria (), Gmira Douaa () and Reina Alizée ()
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Munoz Lucie: ECE Paris School of Engineering
Boudet Florian: ECE Paris School of Engineering
Galano Victoria: ECE Paris School of Engineering
Gmira Douaa: ECE Paris School of Engineering
Reina Alizée: ECE Paris School of Engineering

No 401426, Proceedings of Economics and Finance Conferences from International Institute of Social and Economic Sciences

Abstract: Commodities pricing needs a specific approach as they are often linked to each other and so are expectedly doing their prices. They are called co-integrated when at least one stationary linear combination exists between them. Though widespread in economic literature, and even if many equilibrium relations and co-movements exist in economy, this principle of co-movement is not developed in derivatives field. Present study focuses on the following problem: How can the price of a forward agreement on a commodity be simulated, when it is co-integrated with other ones? Theoretical analysis is developed from Gibson-Schwartz model and analytical solution is given for short maturities contracts and under risk-neutral conditions. Application has been made to crude oil and heating oil energy commodities and result confirms the applicability of proposed method.

Keywords: Co-integration; Commodities; Forward Pricing; Gibson-Schwartz. (search for similar items in EconPapers)
JEL-codes: C32 D40 (search for similar items in EconPapers)
Pages: 7 pages
Date: 2014-07
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Published in Proceedings of the Proceedings of the 2nd Economics & Finance Conference, Vienna, Jul 2014, pages 356-362

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Persistent link: https://EconPapers.repec.org/RePEc:sek:iefpro:0401426

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