A0328
Title: A multi-factor model for pricing commodities when volatility, interest rate and convenience yield are stochastic
Authors: Christian Tezza - University of Bologna (Italy) [presenting]
Luca Vincenzo Ballestra - Alma Mater Studiorum University of Bologna (Italy)
Abstract: A novel affine model is introduced for commodity pricing that builds on previous well-known approaches, incorporating four stochastic uncertainty factors. The proposed model allows for both the volatility and long-run mean of commodity prices, as well as the instantaneous convenience yield and interest rate, to be stochastic. The Kalman filter is utilized in conjunction with quasi-maximum likelihood estimation to estimate the model parameters. An empirical analysis that focuses on different commodity futures is conducted to evaluate the performance of the novel specification. The model's in-sample and out-of-sample results are compared to existing approaches. The approach can help enhance risk management strategies and improve decision-making in commodity markets.
