Journal Article

Economic Linkages, Relative Scarcity, and Commodity Futures Returns

Jaime Casassus, Peng Liu and Ke Tang

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 26, issue 5, pages 1324-1362
Published in print May 2013 | ISSN: 0893-9454
Published online December 2012 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhs127
Economic Linkages, Relative Scarcity, and Commodity Futures Returns

More Like This

Show all results sharing these subjects:

  • Econometrics and Mathematical Economics
  • Economics
  • General Equilibrium and Disequilibrium
  • Information, Knowledge, and Uncertainy
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment

GO

Show Summary Details

Preview

This paper shows that economic linkages among commodities create a source of long-term correlation between futures returns. We extend the theory of storage to a multi-commodity level and find that the convenience yield of a commodity depends on its relative scarcity with respect to other related commodities. This implies a feedback effect between commodities that is necessary to replicate the upward-sloping correlation term structure of futures returns observed for related commodities. We present a multi-commodity affine model that validates our theoretical predictions and considerably reduces the pricing errors in out-of-sample crack spread options.

Keywords: C0; G12; G13; D51; D81; E2

Journal Article.  15070 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics ; Economics ; General Equilibrium and Disequilibrium ; Information, Knowledge, and Uncertainy ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.