Comparison of commodity future pricing approaches with cointegration techniques

Abstract

Commodity future prices are explained either by price expectations and a risk premium in the theory of normal backwardation or with the theory of storage in a cost of carry valuation. Both approaches are compared in separate equations with Johansen cointegration tests. The data sample contains five LME metals with maturities of 3–27 months and real inventory data. It is found that expected spot prices explain only short maturity future prices. But the cost of carry approach, with the inventory level-dependent convenience yield, explains prices for all maturities.

Trading VIX Futures Under Mean Reversion with Regime Switching

“…In contrast to Brennan and Schwartz (1990) and Dai et al (2011), we do not a priori assume the existence of a stochastic basis that may or may not be consistent with the futures prices, but consider the long and short strategies that take advantage of the temporal price difference of futures. Similar trading strategies have been studied by , , Leung et al (2014), , Leung and Shirai (2015) and Stepanek (2015), among others. Moreover, the strategy studied herein can be automated.…”

Trading VIX futures under mean reversion with regime switching

“…In contrast to Brennan and Schwartz (1990) and Dai et al (2011), we do not a priori assume the existence of a stochastic basis that may or may not be consistent with the futures prices, but consider the long and short strategies that take advantage of the temporal price difference of futures. Similar trading strategies have been studied by , , Leung et al (2014), , Leung and Shirai (2015) and Stepanek (2015), among others. Moreover, the strategy studied herein can be automated.…”