Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 The Basics of Storable Commodity Modeling
- 3 High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing
- 4 The Empirical Performance of the Two-Factor Storage Model
- 5 Stochastic Fundamental Volatility, Speculation, and Commodity Storage
- 6 The Pricing of Seasonal Commodities
- 7 The Dynamics of Carbon Markets
- 8 The Structural Modeling of Non-Storables: Electricity
- References
- Author Index
- Subject Index
3 - High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 The Basics of Storable Commodity Modeling
- 3 High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing
- 4 The Empirical Performance of the Two-Factor Storage Model
- 5 Stochastic Fundamental Volatility, Speculation, and Commodity Storage
- 6 The Pricing of Seasonal Commodities
- 7 The Dynamics of Carbon Markets
- 8 The Structural Modeling of Non-Storables: Electricity
- References
- Author Index
- Subject Index
Summary
Introduction
Many important commodities are produced and consumed continuously and exhibit little seasonality in demand. These include the industrial metals (such as copper and lead) and some important energy products (such as crude oil). These products are important (representing a large fraction of total traded commodity production, value, and trading volume). Moreover, it is easiest to analyze the high-frequency price behavior of these commodities in the structural storage model framework because the continuous nature of product and non-seasonality of demand makes it reasonable to impose time homogeneity, which makes numerical solution simpler; it is not reasonable to impose such homogeneity for seasonally produced commodities, such as corn. Therefore, considerations of importance and tractability make it desirable to focus initially on continuously produced commodities. These will be the subject of the next three chapters.
Most received storage models posit a single source of uncertainty. Sometimes this single source is portrayed as a “net demand shock.” Whatever its interpretation, it is readily evident that a one-shock model is inadequate to describe the rich behavior of actual commodity prices.
This is most evident when one looks at correlations between commodity futures prices with different times to expiration, or correlations between spot and futures prices. In a single factor model, all prices on the same commodity, regardless of expiration date, are instantaneously perfectly correlated. If there is only one source of uncertainty, futures prices with different times to expiration may exhibit different variances because they have different sensitivities to shocks to these uncertainties.
- Type
- Chapter
- Information
- Commodity Price DynamicsA Structural Approach, pp. 44 - 72Publisher: Cambridge University PressPrint publication year: 2011