Back
 JMF  Vol.5 No.3 , August 2015
Approximation for Convenience Yield with Mean-Reverting Commodity Price
Abstract: The convenience yield of commodities is an important factor influencing futures prices and its accurate measure is a hot issue. Standard option-based measures assume the commodity prices follow a geometric Brownian motion, while some empirical evidence supports that the commodity prices show mean-reverting properties. Using a mean-reverting price process, we derive an analytical convenience yield approximation. We use the soybean meal and strong wheat futures to compare the new measure with the existing approximations. Empirical study shows that the new method with the mean-reverting price process is a better approximation for convenience yields.
Cite this paper: Zhao, Q. and Gu, G. (2015) Approximation for Convenience Yield with Mean-Reverting Commodity Price. Journal of Mathematical Finance, 5, 233-242. doi: 10.4236/jmf.2015.53021.
References

[1]   Kaldor, N. (1939) Speculation and Economic Stability. The Review of Economic Studies, 7, 1-27.
http://dx.doi.org/10.2307/2967593

[2]   Brennan, M.J. (1958) The Supply of Storage. The American Economic Review, 48, 50-72.

[3]   Longstaff, F.A. (1995) How Much can Marketability Affect Security Values? The Journal of Finance, 50, 1767-1774.
http://dx.doi.org/10.1111/j.1540-6261.1995.tb05197.x

[4]   Heaney, R. (2002) Approximation for Convenience Yield in Commodity Futures Pricing. Journal of Futures Markets, 22, 1005-1017.
http://dx.doi.org/10.1002/fut.10036

[5]   Hochradl, M. and Rammerstorfer, M. (2012) The Convenience Yield Implied in European Natural Gas Hub Trading. Journal of Futures Markets, 32, 459-479.
http://dx.doi.org/10.1002/fut.20523

[6]   Lévy, E. (1997) Exotic Options: The State of the Art. Les Clewlow, Chris Strickland. International Thomson Business Press, London.

[7]   Bessembinder, H, Coughenour, J.F. and Seguin, P.J. (1995) Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure. The Journal of Finance, 50, 361-375.
http://dx.doi.org/10.1111/j.1540-6261.1995.tb05178.x

[8]   Pindyck, R.S. (2001) The Dynamics of Commodity Spot and Futures Markets: A Primer. The Energy Journal, 22, 1-29.
http://dx.doi.org/10.5547/issn0195-6574-ej-vol22-no3-1

[9]   Schwartz, E.S. (1997) The Stochastic Behavior of Commodity Prices: Implication for Valuation and Hedging. The Journal of Finance, 52, 923-973.
http://dx.doi.org/10.1111/j.1540-6261.1997.tb02721.x

[10]   Dockner, E.J., Eksi, Z. and Rammerstorfer, M. (2015) A Convenience Yield Approximation Model for Mean-Reverting Commodities. Journal of Futures Markets, 35, 625-654.

 
 
Top