Review of Financial Studies Vol. 26 No. 5 2013
Economic Linkages, Relative Scarcity, and Commodity Futures Returns
open access
Abstract
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.
- DOI
- 10.1093/rfs/hhs127
- Volume
- 26
- Issue
- 5
- Pages
- 1324-1362
- Language
- en
- Sources
- openalex crossref