Chen, J., Ewald, C. , Ouyang, R., Westgaard, S. and Xiao, X. (2022) Pricing commodity futures and determining risk premia in a three factor model with stochastic volatility: the case of Brent crude oil. Annals of Operations Research, 313(1), pp. 29-46. (doi: 10.1007/s10479-021-04198-7)
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Abstract
In this paper we introduce a three factor model to price commodity futures contracts. This model allows both the spot price volatility and convenience yield to be stochastic, nevertheless futures prices can be obtained conveniently in closed form. Further, we use Brent crude oil futures prices to calibrate the model using the extended Kalman filter. In comparison to the benchmark model for commodity futures pricing, the Schwartz two-factor model, our three factor model shows a superior fit for contracts that have longer maturities. We further assess risk premia in Brent crude oil through the two models and observe that the Schwartz two-factor model over-predicts risk premia in comparison to the new model.
| Item Type: | Articles |
|---|---|
| Additional Information: | This work is support by the National Natural Science Foundation of China (Grant No. 72001090), the Guangdong Basic and Applied Basic Research Foundation (No.2020A1515010846) and the Natural Science Foundation of Zhejiang Province (No. LQ20G010003). |
| Status: | Published |
| Refereed: | Yes |
| Glasgow Author(s) Enlighten ID: | Ewald, Professor Christian and CHEN, JILONG and Ouyang, Miss Ruolan |
| Authors: | Chen, J., Ewald, C., Ouyang, R., Westgaard, S., and Xiao, X. |
| College/School: | College of Social Sciences > Adam Smith Business School > Economics |
| Journal Name: | Annals of Operations Research |
| Publisher: | Springer |
| ISSN: | 0254-5330 |
| ISSN (Online): | 1572-9338 |
| Published Online: | 15 July 2021 |
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