Commodities

Summary

Since a major source of income for many countries comes from exporting commodities, price discovery and information transmission between commodity futures markets are key issues for continued economic development.

This book covers the fundamental theory of and derivatives pricing for major commodity markets as well as the interaction between commodity prices, the real economy, and other financial markets. After an extensive theoretical and practical introduction, the book is divided into four parts:

1. Oil Products – considers the structural changes in the demand and supply for hedging services that are increasingly determining the price of oil
2. Other Commodities – examines markets related to agricultural commodities, including natural gas, wine, soybeans, corn, gold, silver, copper, and other metals
3. Commodity Prices and Financial Markets – investigates the contemporary aspects of the financialization of commodities, including stocks, bonds, futures, currency markets, index products, and exchange traded funds
4. Electricity Markets – supplies an overview of the current and future modelling of electricity markets

With contributions from well-known academics and practitioners, this volume includes coverage of the fundamental theory of futures/forwards and derivatives pricing for major commodity markets. The contributions to Sections I and II of this volume, which treat storable or agricultural commodities, take speculation into account through a consideration of markets over time being either in backwardation or contango.

Up-to-date considerations of both trading and investment are included in Sections I, II, and III. The book also reviews the effects of urbanization and the expanding middle-class population on commodities.

Table of Contents

SECTION I: OIL PRODUCTS

Inconvenience Yield, or the Theory of Normal Contango
Ilia Bouchouev
Determinants of Oil Futures Prices and Convenience Yields
M. A. H. Dempster, Elena Medova, and Ke Tang
Pricing and Hedging of Long-Term Futures and Forward Contracts with a Three-Factor Model
Kenichiro Shiraya and Akihiko Takahashi
An Empirical Study of the Impact of Skewness and Kurtosis on Hedging Decisions
Jing-Yi Lai
Long-Term Spread Option Valuation and Hedging
M.A.H. Dempster, Elena Medova, and Ke Tang
Analysing the Dynamics of the Refining Margin: Implications for Valuation and Hedging
Andrés García Mirantes, Javier Población and Gregorio Serna
Quantitative Spread Trading on Crude Oil and Refined Products Markets
Mark Cummins and Andrea Bucca

SECTION II: OTHER COMMODITIES

Inversion of Option Prices for Implied Risk-Neutral Probability Density Functions: General Theory and Its Applications to the Natural Gas Market
Yijun Du, Chen Wang, and Yibing Du

Investing in the Wine Market: A Country-Level Threshold Cointegration Approach
Lucia Baldi, Massimo Peri, and Daniela Vandone

Cross-Market Soybean Futures Price Discovery: Does the Dalian Commodity Exchange Affect the Chicago Board of Trade?
Liyan Han, Rong Liang, and Ke Tang

The Structure of Gold and Silver Spread Returns
Jonathan A. Batten, Cetin Ciner, Brian M. Lucey, and Peter G. Szilagyi

Gold and the U.S. Dollar: Tales from the Turmoil
Paolo Zagaglia, Massimiliano, Marzo

A Flexible Model of Term-Structure Dynamics of Commodity Prices: A Comparative Analysis with a Two-Factor Gaussian Model
Hiroaki Suenaga

Application of a TGARCH-Wavelet Neural Network to Arbitrage Trading in the Metal Futures Market in China
Lei Cui, Ke Huang, and H.J. Cai

SECTION III: COMMODITY PRICES AND FINANCIAL MARKETS

Short-Horizon Return Predictability and Oil Prices
Jaime Casassus and Freddy Higuera

Time-Frequency Analysis of Crude Oil and S&P500 Futures Contracts
Joseph McCarthy and Alexei G. Orlov

Sectoral Stock Return Sensitivity to Oil Price Changes: A Double-Threshold FIGARCH Model
Elyas Elyasiani, Iqbal Mansur, and Babatunde Odusami

Short-Term and Long-Term Dependencies of the S&P 500 Index and Commodity Prices
Michael Graham, Jarno Kiviaho, and Jussi Nikkinen

Portfolio Selection with Commodities Under Conditional Copulas and Skew Preferences
Carlos González-Pedraz, Manuel Moreno, and Juan Ignacio Peña

Strategic Commodity Allocation
Pierre Six

Long–Short Versus Long-Only Commodity Funds
John M. Mulvey

Commodity Markets Through the Business Cycle
Julien Chevallier, Mathieu Gatumel, and Florian Ielpo

The Dynamics of Commodity Prices
Chris Brooks and Marcel Prokopczuk

A Hybrid Commodity and Interest Rate Market Model
Kay F. Pilz and E. Schlögl

SECTION IV: ELECTRICITY MARKETS

Modelling the Distribution of Day-Ahead Electricity Returns: A Comparison
Alessandro Sapio

Stochastic Spot Price Multi-Period Model and Option Valuation for Electrical Markets
Eivind Helland, Timur Aka, and Eric Winnington

Modelling Spikes and Pricing Swing Options in Electricity Markets
Ben Hambly, Sam Howison, and Tino Kluge

Efficient Pricing of Swing Options in Lévy-Driven Models
Oleg Kudryavtsev and Antonino Zanette

Hedging Strategies for Energy Derivatives
Peter Leoni, Nele Vandaele, and Michèle Vanmaele

The Valuation of Clean Spread Options: Linking Electricity, Emissions and Fuels
René Carmona, Michael Coulon, and Daniel Schwarz

Is the EUA a New Asset Class?
Vicente Medina and Angel Pardo

Index

Editor(s) Bio

Michael A.H. Dempster is professor emeritus at the Centre for Financial Research, Department of Pure Mathematics and Statistics, University of Cambridge. Educated at Carnegie Mellon and Oxford, he has taught and researched in leading universities on both sides of the Atlantic and is founding editor-in-chief of Quantitative Finance and the Oxford Handbooks in Finance. Consultant to many global financial institutions, corporations, and governments, he is regularly involved in research presentation and executive education worldwide. He is the author of over 110 research articles in leading international journals and 14 books. His work has won several awards and he is an honorary fellow of the UK Institute of Actuaries, a foreign member of the Academia Lincei (Italian Academy), and managing director of Cambridge Systems Associates Limited, a financial analytics consultancy and software company.

Ke Tang is a professor in the Institute of Economics, School of Social Science, Tsinghua University, where he teaches courses in economics and finance. Before joining Tsinghua in 2014, he was a professor in the Hanqing Advanced Institute of Economics and Finance, Renmin University of China. He received his B.A. in Engineering from Tsinghua University in 2000, Master of Financial Engineering from University of California, Berkley, in 2004, and his doctoral degree in Finance from Cambridge University in 2008. His research has covered such topics as commodity markets, Internet finance and Chinese stock markets. He has published many papers including The Review of Financial Studies, Annual Review of Financial Economics, and the Journal of Banking and Finance. He is currently the managing editor of Quantitative Finance.