Economic Linkages, Relative Scarcity, and Commodity Futures Returns
Jaime Casassus; Peng Liu; Ke Tang.
Review of Financial Studies, 26 (5): 1324-1362, 2013.
This paper shows that economic linkages among commodities create a source of long-term correlation between futures returns. We extend the theory of storage to a multi-commodity level and find that the convenience yield of a commodity depends on its relative scarcity with respect to other related commodities. This implies a feedback effect between commodities that is necessary to replicate the upward-sloping correlation term structure of futures returns observed for related commodities. We present a multi-commodity affine model that validates our theoretical predictions and considerably reduces the pricing errors in out-of-sample crack spread options.
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