Theory of Storage and the Pricing of Commodity Claims |
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Authors: | Nielsen Martin J Schwartz Eduardo S |
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Institution: | (1) Danske Capital, Strodamvej 46, DK-2100 København O, Denmark;(2) Anderson Graduate School of Management, UCLA, USA |
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Abstract: | We extend the literature on commodity pricing by incorporating a link between the spread of forward prices and spot price volatility suggested by the theory of storage. Our model has closed form solutions that are generalizations of the two-factor model of Gibson–Schwartz (1990). We estimate the model on daily copper spot and forward prices using the Kalman filter methodology. Our findings confirm the link between the forward spread and volatility, but also show that the Gibson–Schwartz (1990) model prices forward contracts almost as well. In the pricing of option contracts, however, there are significant differences between the models. |
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Keywords: | commodity pricing theory of storage |
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