Journal Article

Price Mean Reversion, Seasonality, and Options Markets

Chad E. Hart, Sergio H. Lence, Dermot J. Hayes and Na Jin

in American Journal of Agricultural Economics

Volume 98, issue 3, pages 707-725
Published in print April 2016 | ISSN: 0002-9092
Published online August 2015 | e-ISSN: 1467-8276 | DOI: https://dx.doi.org/10.1093/ajae/aav045
Price Mean Reversion, Seasonality, and Options Markets

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Options on agricultural commodities with maturities exceeding one year seldom trade. One possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot-price levels can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs. The model proposed here incorporates mean reversion in spot-price levels and includes a correction for seasonality. Mean reversion and seasonality are both observed in the soybean market. The empirical analysis lends strong support to the model.

Keywords: Bayesian statistics; commodity markets; mean reversion; options; seasonality; G13; Q11

Journal Article.  11477 words.  Illustrated.

Subjects: Economics ; Agricultural Economics

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