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Equilibrium Forward Curves for Commodities
Author(s) -
Routledge Bryan R.,
Seppi Duane J.,
Spatt Chester S.
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00248
Subject(s) - futures contract , economics , commodity , spot contract , econometrics , constraint (computer aided design) , convenience yield , normal backwardation , forward contract , crude oil , microeconomics , mathematical economics , financial economics , mathematics , finance , geometry , petroleum engineering , engineering
We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option's value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of the ‘Samuelson effect’ occur. We extend the model to incorporate a permanent second factor and calibrate the model to crude oil futures data.