The information content of a nonlinear macro-finance model for commodity prices

Saqib Khan, Zeigham Khokher, Timothy Simin

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

State-of-the-art term structure models of commodity prices have serious difficulties extrapolating the prices of long-maturity futures contracts from short-dated contracts. This situation is problematic for valuing real commodity-linked assets. We estimate a nonlinear four-factor continuous time model of commodity price dynamics. The model nests many previous specifications. To estimate the model, we use crude oil prices and inventories. The inventory data and nonlinear price dynamics have a large impact on oil price forecasts. The additional factor in our model compared with current three-factor models has a significant impact on model-implied long-maturity futures prices.

Original languageEnglish (US)
Pages (from-to)2818-2850
Number of pages33
JournalReview of Financial Studies
Volume30
Issue number8
DOIs
StatePublished - Jan 1 2017

Fingerprint

Commodity prices
Finance
Information content
Factors
Price dynamics
Maturity
Assets
Fama-French three-factor model
Commodities
Continuous-time model
Crude oil price
Oil prices
Futures prices
Term structure models
Futures contracts

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "State-of-the-art term structure models of commodity prices have serious difficulties extrapolating the prices of long-maturity futures contracts from short-dated contracts. This situation is problematic for valuing real commodity-linked assets. We estimate a nonlinear four-factor continuous time model of commodity price dynamics. The model nests many previous specifications. To estimate the model, we use crude oil prices and inventories. The inventory data and nonlinear price dynamics have a large impact on oil price forecasts. The additional factor in our model compared with current three-factor models has a significant impact on model-implied long-maturity futures prices.",
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The information content of a nonlinear macro-finance model for commodity prices. / Khan, Saqib; Khokher, Zeigham; Simin, Timothy.

In: Review of Financial Studies, Vol. 30, No. 8, 01.01.2017, p. 2818-2850.

Research output: Contribution to journalArticle

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