Commodity Model Research Articles

Inadimplência e colateral na teoria microeconômica do equilíbrio dos mercados

Este ensaio apresenta a evolução dos mais recentes modelos matemáticos de equilíbrio geral, começando pelo modelo de mercadorias contingentes, passando pelo modelo sequencial com ativos financeiros, até chegar ao caso de equilíbrio com inadimplência e mercados de ativos "colateralizados". Para tanto, discorre-se sobre as principais ideias com respeito à aplicação da teoria microeconômica do equilíbrio geral a situações que envolvam a troca e a alocação de recursos sob condições de incerteza. Depois, apresentam-se as condições de equilíbrio geral quando os mercados financeiros são incompletos. Faz-se uma avaliação crítica das hipóteses assumidas por tais modelos. Na sequência, introduz-se a discussão do papel da inadimplência no equilíbrio geral desses mercados, e finalmente discute-se o efeito das garantias (colaterais) para o equilíbrio geral dos mercados. Considerando-se uma seleção de oito importantes estudos, o artigo examina os pressupostos matemáticos e comportamentais de cada família de modelos e passa em revista os principais teoremas que demonstram, ou não, a existência do equilíbrio geral em mercados incompletos de ativos com inadimplência e colaterais. Segue ainda uma classificação das hipóteses subjacentes ao conjunto de teoremas de equilíbrio geral demonstrados na literatura considerada.

Cross-Hedging of Inflation Derivatives on Commodities: The Informational Content of Futures Markets

According to the macro-econometric literature, the impact of exogenous oil price shocks on Inflation have greatly increased in the last two decades throughout OECD countries while the persistence of those shocks on long-term inflation, namely core inflation, has dramatically decreased. In the meantime, the market for inflation derivatives soared, spurred by a revival of the primary inflation-linked bond market. As the contribution of core inflation to the total headline inflation volatility bottomed, most of the volatility of headline inflation should thus be explained by changes in the spread between headline and core inflation indicators: a factor closely linked to commodity markets. This economic analysis should have important financial arbitrage implications in the futures market: are exogenous shocks on oil futures markets incorporated into zero coupon inflation indexed swap prices? To investigate this issue, we propose on the one hand a four-factor model for both inflation and nominal rates, and on the other hand a two-factor model for commodities. We proceed to an empirical estimation of the model using prices of oil futures contracts and inflation breakeven rates from which we can in particular extract a synthetic core inflation forward curve.

Commodity Futures Forecast Returns and Not Prices

This paper investigates the forecastability of prices and returns in commodity futures markets. To examine the implications for models of commodity prices we derive a new canonical affine form that lends itself to model evaluation and comparison. Both regressions and model estimates imply that effectively all variation in the term structure of futures prices is due to time varying risk premiums and none to price forecasts. The model estimates further suggest that the economic quantity that links futures prices to storage -- the cost of carry -- is pinned down unambiguously by the data.

In This Issue

In This Issue

Measuring bias in a term-structure model of commodity prices through the comparison of simultaneous and sequential estimation

This study examines bias in a term-structure model of commodity prices in specifying the true stochastic dynamics of underlying spot price. The bias is quantified by comparing the model estimated by the conventional method of estimating all model parameters simultaneously with a panel of futures prices and the model estimated by an alternative method of estimating model parameters in two steps. In this alternative approach, a subset of model parameters is first estimated on the first difference of observed futures prices so that these parameters are free from bias in specifying deterministic price variation and the dynamics of the underlying state variables. In the second step, the remaining model parameters are estimated on the futures price equations, while holding the parameters estimated in the first step. Empirical applications to four commodities (gold, crude oil, natural gas, and corn) reveal that the two-factor model widely considered in the literature is subject to a misspecification bias of substantial size. Out-of-sample forecast test indicates that, for three of the four commodities considered, the model estimated by the sequential method yields a considerably more accurate price forecast than the model estimated by the simultaneous method.

Two-stage optimal ordering policy of joint inventory with backlogging for seasonal commodity

This paper proposed a two-stage inventory model for seasonal commodity,in which the market and manufacturing channels were combined.This model can be used to solve the production policy and the order policies of the raw materials for the manufacturer.By assuming that the retailers' demand obeys normal distribution and that the retailer makes orders according to the newsboy model,the necessary and sufficient conditions were given for the optimal solution of production size,wholesale price,and replenishment cycle of raw materials for the manufacturer.Finally,the necessary condition was explored in order to obtain managerial insights and economic implications based on numerical examples and sensitivity analysis.

A Methodology for Geometrical Model and Commodity Model Integration

A Methodology for Geometrical Model and Commodity Model Integration

Limits to arbitrage and hedging: Evidence from commodity markets

We build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases in producers' hedging demand or speculators' capital constraints increase hedging costs via price-pressure on futures. These in turn affect producers' equilibrium hedging and supply decision inducing a link between a financial friction in the futures market and the commodity spot prices. Consistent with the model, measures of producers' propensity to hedge forecasts futures returns and spot prices in oil and gas market data from 1979 to 2010. The component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect equilibrium commodity supply and prices.

Subglobal Climate Agreements and Energy‐intensive Activities: An Evaluation of Carbon Leakage in the Copper Industry

AbstractSubglobal climate policies induce changes in international competitiveness and favour a relocation of carbon‐emitting activities to nonabating regions. In this paper, we evaluate the potential for CO abatement and the emissions ‘leakage’ effect in the copper industry, a prominent energy‐intensive trade‐exposed sector. We formulate a plant‐level spatial equilibrium model for copper commodities in which parameters describing the behavioural response of agents are calibrated to a set of estimated price elasticities. We find producers and consumers to be price inelastic even in the long run, making the copper industry unresponsive to climate policies. Monte Carlo simulations with our model based on statistical uncertainty on elasticity estimates suggest that around 30 per cent of emissions reductions in industrialised countries would be compensated by an increase of emissions in nonabating countries.

A Jump Diffusion Model for Agricultural Commodities with Bayesian Analysis

AbstractStochastic volatility, price jumps, seasonality, and stochastic cost of carry have been included separately, but not collectively, in pricing models of agricultural commodity futures and options. We propose a comprehensive model that incorporates all four features. We employ a special Markov chain Monte Carlo algorithm, new in the agricultural commodity derivatives pricing literature, to estimate the proposed stochastic volatility (SV) and stochastic volatility with jumps (SVJ) models. Overall model fitness tests favor the SVJ model. The in‐sample and out‐of‐sample pricing results for corn, soybeans and wheat generally, with few exceptions, lend support for the SVJ model. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:235–260, 2014

Subglobal Climate Agreements and Energy-Intensive Activities: An Evaluation of Carbon Leakage in the Copper Industry

Subglobal climate policies induce changes in international competitiveness and favor a relocation of carbon-emitting activities to non-abating regions. In this paper, we evaluate the potential for CO2 abatement and the emissions 'leakage' effect in the copper industry, a prominent energy-intensive trade-exposed sector. We formulate a plant-level spatial equilibrium model for copper commodities in which parameters describing the behavioral response of agents are calibrated to econometric estimates of price elasticities. We find producers and consumers to be price inelastic even in the long-run, making the copper industry unresponsive to climate policies. Monte Carlo simulations with our model based on statistical uncertainty on elasticity estimates suggest that around 30% of emissions reductions in industrialized countries would be compensated by an increase of emissions in non-abating countries.

Cross-Hedging of Inflation Derivatives on Commodities: The Informational Content of Futures Markets

According to the macro-econometric literature, the impact of exogenous oil price shocks on Inflation have greatly increased in the last two decades throughout OECD countries while the persistence of those shocks on long-term inflation, namely core inflation, has dramatically decreased. In the meantime, the market for inflation derivatives soared, spurred by a revival of the primary inflation-linked bond market. As the contribution of core inflation to the total headline inflation volatility bottomed, most of the volatility of headline inflation should thus be explained by changes in the spread between headline and core inflation indicators: a factor closely linked to commodity markets. This economic analysis should have important financial arbitrage implications in the futures market: are exogenous shocks on oil futures markets incorporated into zero coupon inflation indexed swap prices? To investigate this issue, we propose on the one hand a four-factor model for both inflation and nominal rates, and on the other hand a two-factor model for commodities. We proceed to an empirical estimation of the model using prices of oil futures contracts and inflation breakeven rates from which we can in particular extract a synthetic core inflation forward curve.

Second-best efficiency of allocation rules: strategy-proofness and single-peaked preferences with multiple commodities

We study strategy-proof allocation rules in economies with perfectly divisible multiple commodities and single-peaked preferences. In this setup, it is known that the incompatibility among strategy-proofness, Pareto efficiency and non-dictatorship arises in contrast with the Sprumont (Econometrica 59:509–519, 1991) one commodity model. We first investigate the existence problem of strategy-proof and second-best efficient rules, where a strategy-proof rule is second-best efficient if it is not Pareto-dominated by any other strategy-proof rules. We show that there exists an egalitarian rational (consequently, non-dictatorial) strategy-proof rule satisfying second-best efficiency. Second, we give a new characterization of the generalized uniform rule with the second-best efficiency in two-agent case.

TIME‐CHANGED ORNSTEIN–UHLENBECK PROCESSES AND THEIR APPLICATIONS IN COMMODITY DERIVATIVE MODELS

This paper studies subordinate Ornstein–Uhlenbeck (OU) processes, i.e., OU diffusions time changed by Lévy subordinators. We construct their sample path decomposition, show that they possess mean‐reverting jumps, study their equivalent measure transformations, and the spectral representation of their transition semigroups in terms of Hermite expansions. As an application, we propose a new class of commodity models with mean‐reverting jumps based on subordinate OU processes. Further time changing by the integral of a Cox–Ingersoll–Ross process plus a deterministic function of time, we induce stochastic volatility and time inhomogeneity, such as seasonality, in the models. We obtain analytical solutions for commodity futures options in terms of Hermite expansions. The models are consistent with the initial futures curve, exhibit Samuelson's maturity effect, and are flexible enough to capture a variety of implied volatility smile patterns observed in commodities futures options.

Agricultural commodities pricing model applied to the Brazilian sugar market

This article suggests a pricing model for commodities used to produce biofuel. The model is based on the concept that the deterministic component of the Wiener process is not constant and depends on time and exogenous variables. The model, which incorporates theory of storage, the convenience yield and the seasonality of harvests, was applied in the Brazilian sugar market. After predictions were made with the Kalman filter, the model produced results that were statistically more accurate than those returned by the two‐factor model available in the literature.

Calibration and Filtering for Multi Factor Commodity Models with Seasonality: Incorporating Panel Data from Futures Contracts

We construct a general multi-factor model for estimation and calibration of commodity spot prices and futures valuation. This extends the multi-factor long-short model in Schwartz and Smith (Manag Sci 893–911, 2000) and Yan (Review of Derivatives Research 5(3):251–271, 2002) in two important aspects: firstly we allow for both the long and short term dynamic factors to be mean reverting incorporating stochastic volatility factors and secondly we develop an additive structural seasonality model. In developing this non-linear continuous time stochastic model we maintain desirable model properties such as being arbitrage free and exponentially affine, thereby allowing us to derive closed form futures prices. In addition the models provide an improved capability to capture dynamics of the futures curve calibration in different commodities market conditions such as backwardation and contango. A Milstein scheme is used to provide an accurate discretized representation of the s.d.e. model. This results in a challenging non-linear non-Gaussian state-space model. To carry out inference, we develop an adaptive particle Markov chain Monte Carlo method. This methodology allows us to jointly calibrate and filter the latent processes for the long-short and volatility dynamics. This methodology is general and can be applied to the estimation and calibration of many of the other multi-factor stochastic commodity models proposed in the literature. We demonstrate the performance of our model and algorithm on both synthetic data and real data for futures contracts on crude oil.

Trade Liberalization in Primary and Processed Agricultural Products: Should Developing Countries Favour Tariff or Domestic Support Reductions?

Developing Countries (DCs) have remained firm in the current WTO negotiations regarding their demand for significant agricultural trade liberalization. This stance has undoubtedly delayed the conclusion of the Doha Round and one might wonder whether DCs are not depriving themselves from valuable gains from trade by holding out. In line with the theory of second best, we show that too little liberalization could be immiserizing for DCs through numerical simulations of a three-country theoretical trade model of primary agricultural commodities and processed foods. Our model departs from most other models by accounting for vertical linkages and by linking welfare outcomes to parameterized supply-side rigidities at the farm level, which imply that primary goods cannot be substituted costlessly across export destinations, and imperfect substitution between processed foods. While in simpler models DCs can get larger welfare gains from multilateral tariff reductions than from domestic support reductions, our simulations show that this instrument ranking can be reversed. Under a wide range of parameter values, the DC would support a trade agreement only if the latter calls for ambitious tariff cuts. This outcome is consistent with the positions of DCs in the current round of multilateral negotiations over agriculture.

SHIFT WORKING AND TRADE IN LABOUR SERVICES WITH TIME ZONE DIFFERENCES

Using a two-factor (labour and capital), two-good (shift-working and non-shift-working commodities) model with two countries (Home and Foreign), which are located in different time zones, we highlight the impact of trade in labour services (via communications networks) on the comparative advantage of countries capable of such trade. It is shown that a comparative advantage in a shift-working commodity is held by pairs of countries in different time zones and connected through a good communication network. Concerning factor prices, if the shift-working commodity is capital (respectively, labour) intensive, the wage rate for day-shift labour will decrease (respectively, increase) as a result of trade in labour services. It is also demonstrated that this labour service utilization is mutual: some of Home's day-shift labour will be utilized for the Foreign night shift, and vice versa. Thus, periodic trade in labour services occurs across countries.

Effect of Term Structure Model of Futures Price on Procurement Policies

The commodity futures price information conveyed by organized exchanges can be used by commodity processors to improve their procurement process. A practical obstacle in the utilization of this information is that the maturity dates of the traded contracts on the exchange and the decision cycle of commodity processors are not synchronized. In this paper, we develop a modeling framework that incorporates the dynamically evolving futures prices to negotiate forward contracts with their supplier. In particular, the pricing of these forward contracts are critical when their delivery dates are not synchronized with the maturities of the futures contracts traded on the exchange. In addition, we propose a systematic approach to model the trade-offs involved in commodity procurement and to incorporate the latest market prices in the development of optimal procurement polices. To test our models we use two well known models of commodity prices with increasing levels of complexity and precision. We use historical futures prices from CBOT (Chicago Board of Trade) and NYMEX (New York Mercantile Exchange) for wheat and unleaded gasoline respectively, to fit the price model parameters, and to test the inventory model on actual out of sample market prices. Our findings suggest that significant benefits are derived from incorporating systematically the latest futures prices on price models of increased precision.

Rising food inflation and India's monetary policy

PurposeThe purpose of this paper is to analyse the implications of sharply rising food prices for monetary policy in India and similar emerging economies at present.Design/methodology/approachThis paper uses analytical arguments from relevant macroeconomic literature and evidence from late 1960s US data to examine whether the 1970s stagflation was due to the OPEC price hike. It develops a two person (rich and poor), two commodity (food and non‐food) model to examine the impact of rising food prices on GDP, on measures of inflation, and on welfare, in the model.FindingsPreviously neglected evidence indicates that stagflation (simultaneously rising unemployment and inflation) preceded the OPEC price hike. The model results indicate that when food prices rise, the GDP deflator falls relative to the consumer price index (CPI).Research limitations/implicationsThe impact of supply shocks should be investigated by carefully examining links between abnormal rainfall and weather and output and prices on commodity by commodity basis. Further, technical issues pertaining to construction of a composite CPI representative of the population need to be explored.Practical implicationsMonetary policy in India (and similar emerging economies) should focus upon a population weighted CPI or some variant thereof.Social implicationsHigh GDP growth should not lead to complacency, since when food prices are rising, the overall welfare impact may be negative.Originality/valueThe model presented in this paper explains the sustained divergence in India, in recent years, between the CPI versus the GDP deflator measures of inflation. It also highlights a possible similar divergence between GDP and overall welfare.