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Latent jump diffusion factor estimation for commodity futures

Author

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  • Dempster, M.A.H.
  • Medova, Elena
  • Tang, Ke

Abstract

We introduce a new methodology to estimate the latent factors of a jump diffusion illustrated with an application to the commodity futures term structure. Specifically, we propose a new state space form and then use a modified Kalman filter to estimate models with latent jump-diffusion factors. The method is applied to oil and copper futures prices to pin down long and short term jumps in their futures term structure. Estimates of jump arrival times indicate that both important information surprises and market activities generate jumps of different intensities.

Suggested Citation

  • Dempster, M.A.H. & Medova, Elena & Tang, Ke, 2018. "Latent jump diffusion factor estimation for commodity futures," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 35-54.
    • Handle: RePEc:eee:jocoma:v:9:y:2018:i:c:p:35-54
    DOI: 10.1016/j.jcomm.2018.01.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Latent factors; Jumps; Non-Gaussian state space models; Modified Kalman filter; Commodity futures;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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