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A Stochastic Factor Model for Risk Management of Commodity Derivatives

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  • Zi-Yi Guo

    (Wells Fargo Bank, N.A.)

Abstract

In the last two years, the world crude oil prices have dropped dramatically, and consequently the oil market has become very volatile and risky. Since energy markets play very important roles in the international economy and have led several global economic crises, risk management of energy products prices becomes very important for both academicians and market participants. We apply Schwartz and Smith?s model (2000) to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts. The model includes a long-term factor and a short-term factor. We show that the two factors explain the Samuelson effect well and the model present well goodness of fit. Our backtesting results demonstrate that the models provide satisfactory risk measures for listed crude oil futures contracts. A simple estimation method possessing quick convergence is developed.

Suggested Citation

  • Zi-Yi Guo, 2017. "A Stochastic Factor Model for Risk Management of Commodity Derivatives," Proceedings of Economics and Finance Conferences 4507452, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iefpro:4507452
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    References listed on IDEAS

    as
    1. David Cabedo, J. & Moya, Ismael, 2003. "Estimating oil price 'Value at Risk' using the historical simulation approach," Energy Economics, Elsevier, vol. 25(3), pages 239-253, May.
    2. Costello, Alexandra & Asem, Ebenezer & Gardner, Eldon, 2008. "Comparison of historically simulated VaR: Evidence from oil prices," Energy Economics, Elsevier, vol. 30(5), pages 2154-2166, September.
    3. Gonzalo Cortazar & Lorenzo Naranjo, 2006. "An N‐factor Gaussian model of oil futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(3), pages 243-268, March.
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    Cited by:

    1. Simone Kruse & Thomas Tischer & Timo Wittig, 2017. "A New Empirical Investigation Of The Platinum Spot Returns," Journal of Smart Economic Growth, , vol. 2(2), pages 141-148, September.

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    More about this item

    Keywords

    Factor model; Samuelson effect; value-at-risk; least square estimation.;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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