Quotation Dockner, Engelbert, Eksi-Altay, Zehra, Rammerstorfer, Margarethe. 2015. A Convenience Yield Approximation Model for Mean-Reverting Commodities. Journal of Futures Markets, 35 (7), 625-654.


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Abstract

Standard option-based approximations for convenience yields make use of the assumption that commodity spot prices follow a geometric Brownian motion. While there is some empirical support for this assumption, prices of a wide variety of (agricultural) commodities mean revert. Using a mean-reverting spot price process we derive a novel convenience yield approximation analytically. It corresponds to the difference between the present values of two floating-strike Asian options written on the spot and the futures prices, respectively. Using natural gas spot and futures price data from four different trading locations, we compare convenience yield estimates derived from existing approximations to those of our new measure. We find that convenience yield estimates vary substantially across approximation methods and that differences can be attributed to the cost of carry and the moneyness of the options.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Journal of Futures Markets
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-B, WH-B
Language English
Title A Convenience Yield Approximation Model for Mean-Reverting Commodities
Volume 35
Number 7
Year 2015
Page from 625
Page to 654
Reviewed? Y
URL http://onlinelibrary.wiley.com/doi/10.1002/fut.21670/abstract
DOI http://dx.doi.org/10.1002/fut.21670
Open Access N

Associations

People
Dockner, Engelbert (Details)
Eksi-Altay, Zehra (Details)
Rammerstorfer, Margarethe (Details)
Organization
Institute for Statistics and Mathematics IN (Details)
Institute for Finance, Banking and Insurance IN (Details)
Research Institute for Capital Markets FI (Details)
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