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Co-integrated Commodity Forward Pricing Model

Author

Listed:
  • 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)

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.

Suggested Citation

  • Munoz Lucie & Boudet Florian & Galano Victoria & Gmira Douaa & Reina Alizée, 2014. "Co-integrated Commodity Forward Pricing Model," Proceedings of Economics and Finance Conferences 0401426, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iefpro:0401426
    as

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    File URL: https://iises.net/proceedings/2nd-economics-finance-conference-vienna/table-of-content/detail?cid=4&iid=20&rid=1426
    File Function: First version, 2014
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    More about this item

    Keywords

    Co-integration; Commodities; Forward Pricing; Gibson-Schwartz.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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