Long and Short Term Jumps in Commodity Futures Prices
52 Pages Posted: 27 Mar 2008 Last revised: 15 Dec 2010
Date Written: March 4, 2008
Abstract
This paper analyzes long- and short- term jumps in commodity futures from the statistical and economic perspectives. First we show that both commodity futures returns and convenience yields are strongly leptokurtic. Thus, we propose a non-Gaussian model by adding jumps to the Schwartz-Smith (2000) model of commodity futures. Long term (permanent) and short term (transitory) jumps are modeled differently. Thirdly, we propose a new state space form to calibrate the model. Estimates of jump arrival times indicate that both surprising important information and market activities generate jumps of different intensities. Finally, as an application of our model we show that jumps are important for pricing options on commodity futures.
Keywords: commodity futures, convenience yields, jumps, non-Gaussian state space models, extended Kalman lter, importance sampling
JEL Classification: G13
Suggested Citation: Suggested Citation