effects of speculation and interest rates in a carry trade model of commodity prices abstract the paper presents and estimates a model of the prices of oil and other storable commodities a model that can be characterized as reflecting the carry trade it focuses on speculative factors here defined as the trade off between interest rates on the one hand and market participants expectations of future price changes on the other hand it goes beyond past research by bringing to bear new data sources survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today s commodity prices

stock returns implied volatility innovations and the asymmetric volatility phenomenon we study the dynamic relation between daily stock retums and daily innovations in optionderived implied volatilities by simultaneously analyzing innovations in index and firmlevel implied volatilities we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon our results indicate that the relation between stock retums and innovations in systematic volatility idiosyncratic volatility is substantially negative near zero these results suggest that asymmetric volatility is primarily attributed to systematic market wide factors rather than aggregated firm level effects we also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stocic volatility

option valuation with systematic stochastic volatility we use an extension of the equilibrium framework of rubinstein 1976 and brennan 1979 to derive an option valuation formula when the stock return volatility is both stochastic and systematic our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options if the mean volatility and covariance processes for the stock return and the consumption growth are predictable our option valuation formula can be written in preference free form further many popular option valuation formulae in the literature can be written as special cases of our general formula in this paper we investigate the valuation of individual stock options when the volatility of the underlying stock return is stochastic and has a systematic component which is related to the stochastic volatility of the consumption growth or the market return such an investigation is timely and of significant interest because there is now a considerable amount of evidence that the volatility of stock prices is not only stochastic but that it is also highly correlated with the volatility of the market as a whole for example see black 1975 conrad kaul and gultekin 1991 jarrow and rosenfeld 1984 jorion 1988 and ng engle and rothschild 1992 furthermore empirical work by black and scholes 1972 gultekin rogalski and tinic 1982 and whaley 1982 has shown that the empirical biases inherent in the black scholes option prices are different for options on high and low risk stocks because low risk stocks are mainly large firm stocks with stochastic return volatilities that are highly correlated with the return volatility of the market and high risk stocks are mainly small firm stocks with a lessimportant systematic volatility component incorporating systematic volatility effects in option valuation models has the potential to reduce the empirical biases exhibited by prices computed from the black scholes formula we use equilibrium arguments that extend the consumption based representative agent framework of rubinstein 1976 brennan 1979 and stapleton and subrahmanyam 1984 to allow individual asset returns and the consumption growth to exhibit stochastic volatility in particular we permit the volatility of individual asset returns to consist of a systematic component that is related to the consumption or market volatility in addi

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

economic linkages relative scarcity and commodity futures returns 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 the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

long term spread option valuation and hedging this paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium i e cointegrated the spread exhibits properties different from its two underlying commodity prices and should therefore be modelled directly this approach offers significant advantages relative to the traditional two price methods since the correlation between two asset returns is notoriously hard to model in this paper we propose a two factor model for the spot spread and develop pricing and hedging formulae for options on spot and futures spreads two examples of spreads in energy markets the crack spread between heating oil and wti crude oil and the location spread between brent blend and wti crude oil are analyzed to illustrate the results

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

the expected utility hypothesis as immunity against the legal utilization of the money pump and underachiever methods the expected utility hypothesis is somewhat controversial not only has it met difficulty in experimental studies 2 but its theoretical status and traditional defense have been questioned 6 3 in particular the argument that non linear preferences allow an individual to make book against himself has been refined in green 3 green shows that an individual whose preferences are not quasi convex can be manipulated into making book against himself but an individual with quasiconvex preferences that are not linear will not make book against himself even though his choices are subject to certain infelicities 3 the present paper applies green s model and the expected utility hypothesis to the administrator of a government institution instead of an individual who is being manipulated as in green 3 we assume that the administrator attempts to exploit the institution for his own benefit expected utility theory is customarily aimed at describing individual choice under uncertainty while the scope of this paper is public choice rather than individual choice we adopt individual choice theory for our analysis with the following situations in mind i the administrator controls the institution s actions in a particular matter ii the administrator technically lacks authority as in i but the limitations on his control are just a formality for example in practice the administrator makes a recommendation and someone else rubber stamps it iii the administrator does not control the institution s actions but he influences them and his influence is important enough to study for example a united states senator cannot simply enact laws at his pleasure but his influence is still a matter of importance we will concentrate on the cases where as a practical matter the administrator has control of a particular action of the institution 4 to simplify exposition in this context we will speak of an administrator running an institution

soybean inventory and forward curve dynamics we present two results concerning soybean prices first we exhibit a simple relationship between stocks and price volatility the observation of an increasing price volatility with decreasing inventory is often mentioned in the literature but has so far been documented using a proxy for inventory see fama and french 1987 1988 litzenberger and rabinowitz 1995 instead we reconstruct a yearly quarterly and monthly database of worldwide soybean inventories using aggregate data from the united states brazil and argentina we show that under all time scales price volatility is an increasing linear function of inverse inventory which we term scarcity second we show how the addition of the factor scarcity in a state variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit we document this property on a 25 year database of cbot futures contracts and show that the superior accuracy also affects long maturity futures contracts an important property for the valuation of long term origination contracts between producing countries and the agrifood industry

implementing a stochastic model for oil futures prices this paper develops a parsimonious three factor model of the term structure of oil futures prices that can be easily estimated from available futures price data in addition it proposes a new simple spreadsheet implementation procedure the procedure is flexible may be used with market prices of any oil contingent claim with closed form pricing solution and easily deals with missing data problems the approach is implemented using daily prices of all futures contracts traded at the new york mercantile exchange between 1991 and 2001 in sample and out of sample tests indicate that the model fits the data extremely well though the paper concentrates on oil the approach can be used for any other commodity with well developed futures markets

ties to the rest autocratic linkages and regime survival the relationship between international linkages and the nature and survival of political regimes has gained increasing attention in recent years but remains one that is poorly understood in this article we make three central contributions to our understanding of international linkage politics and autocratic regime survival first we introduce and develop the concept of autocratic linkage and highlight its importance for understanding the international politics of autocratic survival second we use event history analysis to demonstrate that autocratic linkage has a systematic effect on the duration of authoritarian regimes finally we complement our quantitative analysis with a focused comparison of autocratic linkage politics in the middle east we show that variation in saudi arabian support for autocratic incumbents in the wake of the arab spring protests can be explained in significant part by variation in linkage relationships

stock price distributions with stochastic volatility an analytic approach we study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter we use analytic techniques to derive an explicit closed form solution for the case where volatility is driven by an arithmetic ornstein ublenbeck or ar1 process we then apply our results to two related problems in the finance literature 1 options pricing in a world of stochastic volatility and 2 the relationship between stochastic volatility and the nature of fat tailes in stock price distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

humps in the volatility structure of the crude oil futures market new evidence abstract this paper analyses the volatility structure of commodity derivatives markets the model encompasses hump shaped unspanned stochastic volatility which entails a finite dimensional affine model for the commodity futures curve and quasi analytical prices for options on commodity futures using an extensive database of crude oil futures and futures options spanning 21 years we find the presence of hump shaped partially spanned stochastic volatility in the crude oil market the hump shaped feature is more pronounced when the market is more volatile and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes

do oil prices respond to real interest rates abstract we show that the robustness of an inverse relationship between the real interest rate and real oil price depends crucially on how the real interest rate is calculated and the time frame of the sample consistent with earlier studies we find that the oil price falls with an unexpected rise in either u s or international ex ante real interest rates when the ex post real interest rate is used the oil price only falls with rises to short term rates 3 months or less additionally the response of the oil price to long term ex ante real interest rates must include the period through the mid 2000s for the inverse relationship to appear in contrast the oil price consistently falls with unexpected rises in short term real interest rates throughout the entire sample we draw two conclusions from the results the first is that the oil price is consistently responsive to short term u s and international real interest rates underlying the importance of storage second oil prices have become more responsive to long term real interest rates over time

commodity prices interest rates and the dollar this paper sheds light on recent fluctuations in commodity prices we investigate whether a decline in real interest rates and the us dollar contributes to higher commodity prices and whether commodity prices display overshooting behavior in response to changes in real interest rates we analyze the behavior of real prices of crude oil food metals and industrial raw materials the analysis is based on structural var models estimated on quarterly data over the period 1990q1 2007q4 our results suggest that commodity prices increase significantly in response to reductions in real interest rates moreover oil prices and prices of industrial raw materials tend to display overshooting behavior in response to such interest rate changes the evidence also suggests that a weaker dollar leads to higher commodity prices shocks to interest rates and the dollar are found to account for substantial shares of fluctuations in commodity prices

pricing of long dated commodity derivatives do stochastic interest rates matter abstract does modelling stochastic interest rates beyond stochastic volatility improve pricing performance on long dated commodity derivatives to answer this question we consider futures price models for commodity derivatives that allow for stochastic volatility and stochastic interest rates and a correlation structure between the underlying variables we examine the empirical pricing performance of these models on pricing long dated crude oil derivatives estimating the model parameters from historical crude oil futures prices and option prices we find that stochastic interest rate models improve pricing performance on long dated crude oil derivatives when the interest rate volatility is relatively high furthermore increasing the model dimensionality does not tend to improve the pricing performance on long dated crude oil option prices but it matters for long dated futures prices we also find empirical evidence for a negative correlation between crude oil futures prices and interest rates that contributes to improving fit to long dated crude oil option prices

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

analytical pricing of discretely monitored asian style options theory and application to commodity markets we compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square root price dynamics this result combined with the fourier transform pricing method proposed by carr and madan carr p madan d 1999 option valuation using the fast fourier transform journal of computational finance 2 4 summer 61 73 allows us to derive a closed form formula for the fair value of discretely monitored asian style options our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae empirical results based on natural gas data from nymex and corn data from cbot show a remarkable improvement over the main alternative techniques developed for pricing asian style options within the market standard framework of geometric brownian motion

pricing of index options when interest rates are stochastic an empirical test abstract this paper tests amin and jarrow s amin and jarrow 1992 version of merton s merton 1973 stochastic interest rate option pricing formula for stock options in their model the interest rate dynamics are given by the heath et al 1992 term structure model the empirical results using data on european stock index options from the swedish option market show that the amin and jarrow model clearly outperforms the black and scholes 1973 model furthermore the time to maturity bias found in tests of the black and scholes model disappears when the options are priced with the amin and jarrow model

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models