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A cointegrated commodity pricing model
Author(s) -
Nakajima Katsushi,
Ohashi Kazuhiko
Publication year - 2012
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20553
Subject(s) - futures contract , cointegration , commodity , spot contract , economics , econometrics , derivative (finance) , heating oil , crude oil , term (time) , financial economics , commodity market , contango , finance , thermodynamics , physics , quantum mechanics , petroleum engineering , engineering
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.