Abstract
This paper proposes a convenience yield-based pricing for commodity futures, which embeds incompleteness of commodity futures markets in convenience yields. By using the pricing method, we conduct empirical analyses of the prices of WTI crude oil, heating oil, and natural gas futures traded on the NYMEX in order to assess the incompleteness of energy futures markets. We show that the fluctuation from the incompleteness is partly driven by the fluctuation from convenience yields. In addition, it is shown that the incompleteness of natural gas futures market is more highlighted than the incompleteness of WTI crude oil and heating oil futures markets. We apply the implied market price of risk from the NYMEX data to pricing an Asian call option written on WTI crude oil futures. Finally, we try to apply the market incompleteness analysis to the post-crisis periods after 2009.
Highlights
A convenience yield is often used to describe the value to hold commodities as is explained in e.g., [1]
We conduct empirical analyses of the prices of WTI crude oil, heating oil, and natural gas futures traded on the NYMEX to assess the incompleteness of energy futures markets
By using the pricing method we have conducted empirical analyses of the prices of WTI crude oil, heating oil, and natural gas futures traded on the NYMEX in order to assess the incompleteness of energy futures markets
Summary
A convenience yield is often used to describe the value to hold commodities as is explained in e.g., [1]. The relationship between commodity spot and futures prices is characterized by two representations: a convenience yield and stochastic discount factor. Davis [10] and Cao and Wei [11] characterize the prices of weather derivatives, which are generally categorized in commodity derivatives, using utility functions and optimal consumptions This pricing approach may be tractable to determine the price. We consider that two-way concept on intertemporal relationship between commodity spot and futures prices, i.e., a convenience yield can implicitly determine the SDF, will be useful to determine the Sharpe ratio. A convenience yield can offer the maximum Sharpe ratio, i.e., the market price of risk other than commodity spot market price of risk, which is used for commodity derivative pricing.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
