Commodity price dynamics : a structural approach / Craig Pirrong.

Format:

Book

Author/Creator:

Pirrong, Stephen Craig, 1959-

Language:

English

Subjects (All):

Prices.

Prices--Forecasting.

Commodity exchanges.

Physical Description:

xiii, 224 pages : illustrations ; 24 cm

Place of Publication:

New York : Cambridge University Press, 2012.

Summary:

"Commodities have become and 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 commoditites 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 commoditites from aluminum to oil to soybeans to zinc"--Provided by publisher.

Contents:

1 Introduction 1

1.1 Introduction 1

1.2 A Commodity Taxonomy 4

1.3 Commodity Markets and Data 6

1.4 An Overview of the Remainder of the Book 8

1.4.1 Modeling Storable Commodity Prices 9

1.4.2 A Two-Factor Model of a Continuously Produced Commodity 9

1.4.3 The Empirical Performance of the Two-Factor Model 10

1.4.4 Commodity Pricing with Stochastic Fundamental Volatility 10

1.4.5 The Pricing of Seasonally Produced Commodities 11

1.4.6 The Pricing of Pollution Credits 11

1.4.7 Non-Storable Commodities Pricing: The Case of Electricity 12

1.5 Where This Book Fits in the Literature 12

2 The Basics of Storable Commodity Modeling 18

2.1 Introduction 18

2.2 Dynamic Programming and the Storage Problem: An Overview 20

2.2.1 Model Overview 20

2.2.2 Competitive Equilibrium 22

2.2.3 The Next Step: Determining the Forward Price 24

2.2.4 Specifying Functional Forms and Shock Dynamics 27

2.3 A More Detailed Look at the Numerical Implementation 30

2.3.1 Solving a PDE Using Finite Differences: The One-Dimensional Case 36

2.3.2 Solving the 2D PDE 39

2.3.3 Boundary Conditions 40

2.4 Summary 42

3 High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing 44

3.1 Introduction 44

3.2 A Model of the Storage Economy with a Continuously Produced Commodity 47

3.2.1 Introduction 47

3.2.2 Framework and Numerical Solution 47

3.3 Moments and the State Variables 49

3.4 Derivatives Pricing 54

3.5 Extension: Storage Capacity Constraints 65

3.6 Extension: The Effects of Speculation on Price Dynamics in the Storage Economy 67

3.7 Summary and Conclusions 71

4 The Empirical Performance of the Two-Factor Storage Model 73

4.1 Introduction 73

4.2 Empirical Tests of the Theory of Storage: A Brief Literature Review 75

4.3 An Alternative Empirical Approach 77

4.3.1 Overview 77

4.3.2 The Extended Kalman Filter 80

4.3.3 Parameter Choices and Data 83

4.4 Results 84

4.5 The Implications of the Model for the Speculation Debate 100

4.6 Summary and Conclusions 107

5 Stochastic Fundamental Volatility, Speculation, and Commodity Storage 109

5.1 Introduction 109

5.2 Speculation and Oil Prices 114

5.3 The Storage Economy 116

5.4 Equilibrium Competitive Storage 118

5.5 Solution of the Storage Problem 119

5.6 Results: Storage, Prices, and Spreads 120

5.7 Results: The Time Series Behavior of Prices, Stocks, and Volatility 124

5.8 Some Other Empirical Evidence 126

5.9 Conclusions 128

6 The Pricing of Seasonal Commodities 131

6.1 Introduction 131

6.2 The Model 134

6.3 Results 137

6.4 Empirical Evidence 145

6.5 Alternative Explanations for the Empirical Regularities 152

6.5.1 Preferences 152

6.5.2 Inventories as a Factor of Production 155

6.5.3 Multiple Storable Commodities 157

6.6 Summary and Conclusions 162

7 The Dynamics of Carbon Markets 164

7.1 Introduction 164

7.2 The Model 166

7.3 Results 170

7.4 Summary 178

8 The Structural Modeling of Non-Storables: Electricity 181

8.1 Introduction 181

8.2 Electricity Markets 183

8.3 A Structural Model for Pricing Electricity Derivatives 185

8.4 Model Implementation 194

8.5 Commonly Traded Power Options 198

8.5.1 Daily Strike Options 198

8.5.2 Monthly Strike Options 199

8.5.3 Spark Spread Options 199

8.6 Valuation Methodology 200

8.6.1 Daily Strike and Monthly Strike Options 200

8.6.2 Spark Spread Options 201

8.7 Results 202

8.8 Complications 211

8.9 Summary and Conclusions 214.

Notes:

Includes bibliographical references and indexes.

ISBN:

9780521195898

0521195896

OCLC:

717301273

Online:

Contributor biographical information

Publisher description