A Stochastic Factor Model for Risk Management of Commodity Derivatives
Zi-Yi Guo
- pp 26-42
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In this article, the authors apply Schwartz and Smith's model to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts, and they show that the two factors explain the Samuelson effect well and the model present well goodness of fit.Abstract:
In the last two years, the world crude oil prices have dropped dramatically, and consequently the oil market has become very volatile and risky. Since energy markets play very important roles in the international economy and have led several global economic crises, risk management of energy products prices becomes very important for both academicians and market participants. We apply Schwartz and Smith?s model (2000) to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts. The model includes a long-term factor and a short-term factor. We show that the two factors explain the Samuelson effect well and the model present well goodness of fit. Our backtesting results demonstrate that the models provide satisfactory risk measures for listed crude oil futures contracts. A simple estimation method possessing quick convergence is developed.read more
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References
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Journal ArticleDOI
The stochastic behavior of commodity prices: Implications for valuation and hedging
TL;DR: In this article, the authors compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their implication with respect to the valuation of other financial and real assets.
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Techniques for Verifying the Accuracy of Risk Measurement Models
TL;DR: In this paper, the authors consider the formal statistical procedures that could be used to assess the accuracy of value at risk (VaR) estimates and show that verification of the accuracy becomes substantially more difficult as the cumulative probability estimate being verified becomes smaller.
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An Overview of Value at Risk
Darrell Duffie,Jun Pan +1 more
TL;DR: In this article, a broad and accessible overview of models of value at risk (WR), a popular measure o f the market risk of a financial firm's book, the list of positions in various instruments that expose the firm to financial risk, is presented.
Journal ArticleDOI
Short-Term Variations and Long-Term Dynamics in Commodity Prices
TL;DR: The authors developed a two-factor model of commodity prices that allows meanreversion in short-term prices and uncertainty in the equilibrium level to which prices revert, which can be estimated from spot and futures prices.
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Proof that Properly Anticipated Prices Fluctuate Randomly
TL;DR: In this article, the authors deduce a fairly sweeping theorem in which next-period price differences are shown to be uncorrelated with (if not completely independent of) previous period's price differences.