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Can limits‐to‐arbitrage from bounded storage improve commodity term‐structure modeling?

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  • Tore S. Kleppe
  • Atle Oglend

Abstract

This paper develops and estimates a two‐factor competitive storage model for the purpose of pricing commodity futures. The empirical relevance of the model is evaluated for US natural gas and crude oil futures by comparing the pricing performance to reduced form models. Results suggest jump models, both reduced form and economic, improve modeling due to incorporating pricing discontinuities. Furthermore, the economic model precludes carry arbitrage, which appears relevant for pricing natural gas futures. For crude oil, the reduced form models produce superior pricing under nonstationary market conditions, and the economic model produces superior long‐dated futures pricing under stationarity.

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  • Tore S. Kleppe & Atle Oglend, 2019. "Can limits‐to‐arbitrage from bounded storage improve commodity term‐structure modeling?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(7), pages 865-889, July.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:7:p:865-889
    DOI: 10.1002/fut.22006
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    1. Kleppe, Tore Selland & Liesenfeld, Roman & Moura, Guilherme Valle & Oglend, Atle, 2022. "Analyzing Commodity Futures Using Factor State-Space Models with Wishart Stochastic Volatility," Econometrics and Statistics, Elsevier, vol. 23(C), pages 105-127.
    2. Oglend, Atle, 2022. "The commodities/equities beta term-structure," Journal of Commodity Markets, Elsevier, vol. 28(C).

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