Maximal Gaussian Affine Models for Multiple Commodities: A Note
Casassus, Jaime; Liu, Peng; Tang, Ke
This study extends the maximal affine models of single assets to a multi-commodity setup. We show that the correlated version of maximal affine models for a single commodity is no longer maximal for multiple commodities. In the maximal model, the convenience yield of a certain commodity could depend on the prices of other commodities, which is consistent with the structural model in our companion study Casassus, Liu, and Tang [Review of Financial Studies, 26, 1324–1362, 2013]. This cross-commodity relationship is a feedback effect that may generate substantial co-movement among long-run commodity prices, a fact that is consistent with many empirical studies.
futures; commodities; pricing models
Required Publisher Statement: © Wiley. Final version published as: Casassus, J., Liu, P., & Tang, K. (2015). Maximal Gaussian affine models for multiple commodities: A note. Journal of Futures Markets, 35, 75-86. doi: 10.1002/fut.21649Reprinted with permission. All rights reserved.