A cointegrated commodity pricing model |
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| Authors: | Katsushi Nakajima Kazuhiko Ohashi |
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| Affiliation: | 1. Katsushi Nakajima is a Ph.D. student in the Graduate School of International Corporate Strategy, Hitotsubashi University, National Center of Sciences, Tokyo, Japan;2. Kazuhiko Ohashi is a Professor of Finance in the Graduate School of International Corporate Strategy, Hitotsubashi University, National Center of Sciences, Tokyo, Japan. |
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| Abstract: | We propose a commodity pricing model that extends the Gibson–Schwartz two‐factor model to incorporate the effect of linear relations among commodity spot prices, and provide a condition under which such linear relations represent cointegration. We derive futures and call option prices for the proposed model, and indicate that, unlike in Duan and Pliska (2004), the linear relations among commodity prices should affect commodity derivative prices, even when the volatilities of commodity returns are constant. Using crude oil and heating oil market data, we estimate the model and apply the results to the hedging of long‐term futures using short‐term ones. |
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