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
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