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Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates
Author(s) -
CASASSUS JAIME,
COLLINDUFRESNE PIERRE
Publication year - 2005
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/j.1540-6261.2005.00799.x
Subject(s) - convenience yield , spot contract , mean reversion , futures contract , economics , econometrics , commodity , yield (engineering) , financial economics , interest rate , risk premium , monetary economics , finance , materials science , metallurgy
We characterize a three‐factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications. The model allows convenience yields to depend on spot prices and interest rates. It also allows for time‐varying risk premia. Both may induce mean reversion in spot prices, albeit with very different economic implications. Empirical results show strong evidence for spot‐price level dependence in convenience yields for crude oil and copper, which implies mean reversion in prices under the risk‐neutral measure. Silver, gold, and copper exhibit time variation in risk premia that implies mean reversion of prices under the physical measure.