JavaScript is disabled for your browser. Some features of this site may not work without it.
The Stochastic Behavior of Commodity Prices with Heteroscedasticity in the Convenience Yield

Author
Liu, Peng; Tang, Ke
Abstract
We document a new stylized fact regarding the dynamics of the commodity convenience yield: the volatility of the convenience yield is heteroskedastic for industrial commodities; specifically, the volatility (variance) of the convenience yield depends on the convenience yield level. To explore the economic and statistical significance of the improved specification of the convenience yield process, we propose an affine model with three state variables (log spot price, interest rate, and the convenience yield). Our model captures three important features of commodity futures—the heteroskedasticity of the convenience yield, the positive relationship between spot-price volatility and the convenience yield and the dependence of futures risk premium on the convenience yield. Moreover our model predicts an upward sloping implied volatility smile, commonly observed in commodity option market.
Date Issued
2010-07-01Subject
commodity; convenience yield; heteroscedasticity; affine model; volatility smile
Related DOI:
https://doi.org/10.1016/j.jempfin.2010.12.003Rights
Required Publisher Statement: © Elsevier. Final version published as: Liu, P., & Tang, K. (2011). The stochastic behavior of commodity prices with heteroscedasticity in the convenience yield. Journal of Empirical Finance, 18, 211-224. Reprinted with permission. All rights reserved.
Type
article