Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5090805 | Journal of Banking & Finance | 2010 | 13 Pages |
Abstract
One distinguishable feature of storable commodities is that they relate to two markets: cash market and storage market. This paper proves that, if no arbitrage exists in the storage-cash dual markets, the commodity convenience yield has to be non-negative. However, classical reduced-form models for futures term structures could allow serious arbitrages due to the high volatility of the convenience yield. To avoid negative convenience yield, this paper proposes a semi-affine arbitrage-free model, which prices futures analytically and fits futures term structures reasonably well. Importantly, our model prices commodity-related contingent claims (such as calendar spread options) quite differently with classical models.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Peng (Peter) Liu, Ke Tang,