Multi-factor Model of Correlated Commodity Forward Curves for Crude Oil and Shipping Markets PDF Download
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Author: Paul D. Sclavounos
Publisher:
ISBN:
Category :
Languages : en
Pages : 126
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Book Description
An arbitrage free multi-factor model is developed of the correlated forward curves of the crude oil, gasoline, heating oil and tanker shipping markets. Futures contracts trading on public exchanges are used as the primary underlying securities for the development of a multi-factor Gaussian Heath-Jarrow-Morton (HJM) model for the dynamic evolution of the correlated forward curves. An intra- and inter-commodity Principal Component Analysis (PCA) is carried out in order to isolate seasonality and identify a small number of independent factors driving each commodity market. The cross-commodity correlation of the factors is estimated by a two step PCA. The factor volatilities and cross-commodity factor correlations are studied in order to identify stable parametric models, heteroskedasticity and seasonality in the factor volatilities and correlations. The model leads to explicit stochastic differential equations governing the short term and long term factors driving the price of the spot commodity under the risk neutral measure. Risk premia are absent, consistently with HJM arbitrage free framework, as they are imbedded in the factor volatilities and correlations estimated by the PCA. The use of the model is described for the pricing of derivatives written on inter- and intra-commodity futures spreads, Asian options, the valuation and hedging of energy and shipping assets, the fuel efficient navigation of shipping fleets and use in corporate risk management.
Author: Paul D. Sclavounos
Publisher:
ISBN:
Category :
Languages : en
Pages : 126
Get Book Here
Book Description
An arbitrage free multi-factor model is developed of the correlated forward curves of the crude oil, gasoline, heating oil and tanker shipping markets. Futures contracts trading on public exchanges are used as the primary underlying securities for the development of a multi-factor Gaussian Heath-Jarrow-Morton (HJM) model for the dynamic evolution of the correlated forward curves. An intra- and inter-commodity Principal Component Analysis (PCA) is carried out in order to isolate seasonality and identify a small number of independent factors driving each commodity market. The cross-commodity correlation of the factors is estimated by a two step PCA. The factor volatilities and cross-commodity factor correlations are studied in order to identify stable parametric models, heteroskedasticity and seasonality in the factor volatilities and correlations. The model leads to explicit stochastic differential equations governing the short term and long term factors driving the price of the spot commodity under the risk neutral measure. Risk premia are absent, consistently with HJM arbitrage free framework, as they are imbedded in the factor volatilities and correlations estimated by the PCA. The use of the model is described for the pricing of derivatives written on inter- and intra-commodity futures spreads, Asian options, the valuation and hedging of energy and shipping assets, the fuel efficient navigation of shipping fleets and use in corporate risk management.
Author: Per Einar Ellefsen
Publisher:
ISBN:
Category :
Languages : en
Pages : 116
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Book Description
Investment and operational decisions involving commodities are taken based on the forward prices of these commodities. These prices are volatile, and a model of their evolution must correctly account for their volatility and correlation term structure. A two-factor model of the forward curve is proposed and calibrated to the crude oil, shipping, natural gas, and heating oil markets. The theoretical properties of this model are explored, with focus on its decomposition into independent factors affecting the level and slope of the forward curve. The two-factor model is then applied to two problems involving commodity prices. An approximate analytical expression for the prices of Asian options is derived and shown to explain the market prices of shipping options. The floating storage trade, which appeared in the oil market in late 2008, is presented as an optimal stopping problem. Using the two-factor model of the forward curve, the value of storing crude oil is derived and analyzed historically. The analytical framework for physical commodity trading that is developed allows for the calculation of expected profits, risks involved, and exposure to the major risk factors. This makes it possible for market participants to analyze such physical trades in advance, creates a decision rule for when to sell the cargo, and allows them to hedge their exposure to the forward curve correctly.
Author: Gaetano Fileccia
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
In this paper we analyze spot prices and futures quotation data to get inference under both the historical and the risk neutral measure in a commodity crude oil market (data are referred to WTI index which tracks the crude oil barrel price on NYMEX market).While big part of research and techniques in finance deals with risk neutral modeling or with modeling under the historical measure, the purpose of this work is to study the estimation problem under both measures at the same time, through a suitable parametric choice of the Radon-Nikodym derivative.To conduct this estimation we resort to a recent technique in Bayesian inference: the Particle Markov Chain Monte Carlo proposed by Andrieu, Doucet and Holenstein (2010), in which particle filters algorithms are used to estimate the marginal likelihood needed to perform a Markov Chain Monte Carlo inference.We adopt a three factors model to describe the dynamics of the spot price, including a stochastic dynamics for both the volatilty and the convenience yield. For the present model the futures prices and future options prices are available in closed form. Two versions of the original model, with and without jumps in spot prices, are taken into account and results are compared. A comparison is also provided between these models and that originally proposed by Liu and Tang (2011). The inference analysis shows that volatility and jumps improve significantly the ability of the model in capturing both the risk-neutral and the historical dynamics features.
Author: Craig Pirrong
Publisher: Cambridge University Press
ISBN: 1139501976
Category : Business & Economics
Languages : en
Pages : 238
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Book Description
Commodities have become an important component of many investors' portfolios and the focus of much political controversy over the past decade. This book utilizes structural models to provide a better understanding of how commodities' prices behave and what drives them. It exploits differences across commodities and examines a variety of predictions of the models to identify where they work and where they fail. The findings of the analysis are useful to scholars, traders and policy makers who want to better understand often puzzling - and extreme - movements in the prices of commodities from aluminium to oil to soybeans to zinc.
Author: Frank J. Fabozzi
Publisher: John Wiley & Sons
ISBN: 1118539761
Category : Business & Economics
Languages : en
Pages : 640
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Book Description
Volume 1 of the Encyclopedia of Financial Models The need for serious coverage of financial modeling has never been greater, especially with the size, diversity, and efficiency of modern capital markets. With this in mind, the Encyclopedia of Financial Models has been created to help a broad spectrum of individuals ranging from finance professionals to academics and students understand financial modeling and make use of the various models currently available. Incorporating timely research and in-depth analysis, Volume 1 of the Encyclopedia of Financial Models covers both established and cutting-edge models and discusses their real-world applications. Edited by Frank Fabozzi, this volume includes contributions from global financial experts as well as academics with extensive consulting experience in this field. Organized alphabetically by category, this reliable resource consists of thirty-nine informative entries and provides readers with a balanced understanding of today's dynamic world of financial modeling. Volume 1 addresses Asset Pricing Models, Bayesian Analysis and Financial Modeling Applications, Bond Valuation Modeling, Credit Risk Modeling, and Derivatives Valuation Emphasizes both technical and implementation issues, providing researchers, educators, students, and practitioners with the necessary background to deal with issues related to financial modeling The 3-Volume Set contains coverage of the fundamentals and advances in financial modeling and provides the mathematical and statistical techniques needed to develop and test financial models Financial models have become increasingly commonplace, as well as complex. They are essential in a wide range of financial endeavors, and the Encyclopedia of Financial Models will help put them in perspective.
Author: Frank J. Fabozzi
Publisher: John Wiley & Sons
ISBN: 1118539958
Category : Business & Economics
Languages : en
Pages : 3180
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Book Description
An essential reference dedicated to a wide array of financial models, issues in financial modeling, and mathematical and statistical tools for financial modeling The need for serious coverage of financial modeling has never been greater, especially with the size, diversity, and efficiency of modern capital markets. With this in mind, the Encyclopedia of Financial Models, 3 Volume Set has been created to help a broad spectrum of individuals—ranging from finance professionals to academics and students—understand financial modeling and make use of the various models currently available. Incorporating timely research and in-depth analysis, the Encyclopedia of Financial Models is an informative 3-Volume Set that covers both established and cutting-edge models and discusses their real-world applications. Edited by Frank Fabozzi, this set includes contributions from global financial experts as well as academics with extensive consulting experience in this field. Organized alphabetically by category, this reliable resource consists of three separate volumes and 127 entries—touching on everything from asset pricing and bond valuation models to trading cost models and volatility—and provides readers with a balanced understanding of today's dynamic world of financial modeling. Frank Fabozzi follows up his successful Handbook of Finance with another major reference work, The Encyclopedia of Financial Models Covers the two major topical areas: asset valuation for cash and derivative instruments, and portfolio modeling Fabozzi explores the critical background tools from mathematics, probability theory, statistics, and operations research needed to understand these complex models Organized alphabetically by category, this book gives readers easy and quick access to specific topics sorted by an applicable category among them Asset Allocation, Credit Risk Modeling, Statistical Tools 3 Volumes onlinelibrary.wiley.com Financial models have become increasingly commonplace, as well as complex. They are essential in a wide range of financial endeavors, and this 3-Volume Set will help put them in perspective.
Author: Takatoshi Ito
Publisher: University of Chicago Press
ISBN: 0226386899
Category : Business & Economics
Languages : en
Pages : 346
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Book Description
Fluctuations of commodity prices, most notably of oil, capture considerable attention and have been tied to important economic effects. This book advances our understanding of the consequences of these fluctuations, providing both general analysis and a particular focus on the countries of the Pacific Rim.
Author: Andrea Roncoroni
Publisher: John Wiley & Sons
ISBN: 0470661836
Category : Business & Economics
Languages : en
Pages : 1076
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Book Description
Handbook of Multi-Commodity Markets and ProductsOver recent decades, the marketplace has seen an increasing integration, not only among different types of commodity markets such as energy, agricultural, and metals, but also with financial markets. This trend raises important questions about how to identify and analyse opportunities in and manage risks of commodity products. The Handbook of Multi-Commodity Markets and Products offers traders, commodity brokers, and other professionals a practical and comprehensive manual that covers market structure and functioning, as well as the practice of trading across a wide range of commodity markets and products. Written in non-technical language, this important resource includes the information needed to begin to master the complexities of and to operate successfully in today’s challenging and fluctuating commodity marketplace. Designed as a practical practitioner-orientated resource, the book includes a detailed overview of key markets – oil, coal, electricity, emissions, weather, industrial metals, freight, agricultural and foreign exchange – and contains a set of tools for analysing, pricing and managing risk for the individual markets. Market features and the main functioning rules of the markets in question are presented, along with the structure of basic financial products and standardised deals. A range of vital topics such as stochastic and econometric modelling, market structure analysis, contract engineering, as well as risk assessment and management are presented and discussed in detail with illustrative examples to commodity markets. The authors showcase how to structure and manage both simple and more complex multi-commodity deals. Addressing the issues of profit-making and risk management, the book reveals how to exploit pay-off profiles and trading strategies on a diversified set of commodity prices. In addition, the book explores how to price energy products and other commodities belonging to markets segmented across specific structural features. The Handbook of Multi-Commodity Markets and Products includes a wealth of proven methods and useful models that can be selected and developed in order to make appropriate estimations of the future evolution of prices and appropriate valuations of products. The authors additionally explore market risk issues and what measures of risk should be adopted for the purpose of accurately assessing exposure from multi-commodity portfolios. This vital resource offers the models, tools, strategies and general information commodity brokers and other professionals need to succeed in today’s highly competitive marketplace.
Author: Helyette Geman
Publisher: John Wiley & Sons
ISBN: 0470740817
Category : Business & Economics
Languages : en
Pages : 320
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Book Description
Commodities represent today the fastest growing markets worldwide. Historically misunderstood, generally under- studied and under- valued, certainly under- represented in the literature, commodities are suddenly receiving the attention they deserve. Bringing together some of the best authors in the field, this book focuses on the risk management issues associated with both soft and hard commodities: energy, weather, agriculturals, metals and shipping. Taking the reader through every part of the commodities markets, the authors discuss the intricacies of modelling spot and forward prices, as well as the design of new Futures markets. The book also looks at the use of options and other derivative contract forms for hedging purposes, as well as supply management in commodity markets. It looks at the implications for climate policy and climate research and analyzes the various freight derivatives markets and products used to manage shipping and freight risk in a global commodity world. It is required reading for energy and mining companies, utilities’ practitioners, commodity and cash derivatives traders in investment banks, CTA’s and hedge funds
Author: Samya Beidas-Strom
Publisher: International Monetary Fund
ISBN: 1498333486
Category : Business & Economics
Languages : en
Pages : 34
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Book Description
How much does speculation contribute to oil price volatility? We revisit this contentious question by estimating a sign-restricted structural vector autoregression (SVAR). First, using a simple storage model, we show that revisions to expectations regarding oil market fundamentals and the effect of mispricing in oil derivative markets can be observationally equivalent in a SVAR model of the world oil market à la Kilian and Murphy (2013), since both imply a positive co-movement of oil prices and inventories. Second, we impose additional restrictions on the set of admissible models embodying the assumption that the impact from noise trading shocks in oil derivative markets is temporary. Our additional restrictions effectively put a bound on the contribution of speculation to short-term oil price volatility (lying between 3 and 22 percent). This estimated short-run impact is smaller than that of flow demand shocks but possibly larger than that of flow supply shocks.
