An Analysis of the Fish Pool Market in the Context of Seasonality and Stochastic Convenience Yield

Abstract

On the basis of a popular two-factor approach applied in commodity market, we develop a model featuring seasonality and study future contracts written on fresh farmed salmon, which have been actively traded at the Fish Pool Market in Norway since 2006. The model is estimated by means of Kalman filtering, using a rich data set of contracts with different maturities traded at Fish Pool between 1 commodity markets, specifically live cattle which acts as a substitute.We show that the seasonally adjusted model proposed in this paper can describe the behavior of salmon price very well. More importantly we show that seasonality persists in the salmon futures market. This is highly important in pricing of contingent claims, designing hedging strategies and making real investment decisions in marine assets.

Analytic formulas for futures and options for a linear quadratic jump diffusion model with seasonal stochastic volatility and convenience yield: Do fish jump?

“…Trading volume of financial salmon contracts at Fish Pool salmon exchange had been at 90, 449 tonnes in 2016 and almost doubled since 2012 (approximately 15% of annual production of farmed Atlantic salmon in Norway). Not only is the market vital to the Norwegian economy and the world Atlantic salmon trade, it has also been at the center of a large number of academic articles published in the last decade, see for example Ewald & Ouyang (2017), Ewald et al (2016), Solibakke (2012), Bloznelis (2016) and Asche et al (2016). Our empirical analysis focuses on this market as it provides a good benchmark test for assessing the performance of our model against various models in the recent literature, however our results are valid and applicable in a much wider context.…”

“…Our empirical analysis focuses on this market as it provides a good benchmark test for assessing the performance of our model against various models in the recent literature, however our results are valid and applicable in a much wider context. Ewald & Ouyang (2017) have indicated the presence of seasonality, Solibakke (2012) has investigated the presence of volatility in the spot price, but the presence of jumps has not been investigated so far. Our model presents the most comprehensive approach so far to understand Fish Pool prices.…”

“…Some commodities differ from conventional equities in presenting seasonal patterns, especially agricultural and energy commodities. Ewald & Ouyang (2017) adopt a multi-factor model that incorporates seasonal adjustments in convenience yield for the fish pool market and find crucial evidence for seasonality in financial salmon contracts. Richter & Sørensen (2002) utilize a sum of trigonometric functions to capture the seasonality.…”

Pricing commodity futures and determining risk premia in a three factor model with stochastic volatility: the case of Brent crude oil

“…Understanding the stochastic behaviour of commodity prices is vital for the valuation of financial derivatives. In addition it is crucial for designing successful hedging and investment strategies (Schwartz 1997;Ewald and Ouyang 2017). As stated in Schwartz (1997), knowledge about the shape of the forward curve, i.e.…”

Optimal hedging strategies for salmon producers

“…According to the authors, this indicates that the salmon futures market is still less mature than other well-established commodity markets. Ewald and Ouyang (2017) use an extended two-factor model to analyse the Fish Pool futures market and confirm seasonality in salmon spot and futures prices.…”