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Equilibrium Commodity Prices with Irreversible Investment and NonLinear Technologies
, 2005
"... We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil well ..."
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Cited by 21 (3 self)
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We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Even though the state of the economy is fully described by a onefactor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regimeswitching process, the regime being an investment ‘proximity’ indicator. The resulting equilibrium oil price exhibits meanreversion and heteroscedasticity. Further, the risk premium for exposure to commodity risk is timevarying, positive in the farfrominvestment regime but negative in the nearinvestment regime. Further, our model captures many of the stylized facts of oil futures prices, such as backwardation and the ‘Samuelson effect.’ The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously. We estimate our model using the Simulated Method of
The term structure of interest rates in an equilibrium economy with short term and long term investments, Working paper
, 2007
"... Abstract This paper develops an equilibrium model in which agents' heterogeneous investment horizons determine the dynamics of the real term structure of interest rates. The model endogenizes agents' decisions on consumption and investments with short and long term horizons. There are two ..."
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Cited by 2 (0 self)
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Abstract This paper develops an equilibrium model in which agents' heterogeneous investment horizons determine the dynamics of the real term structure of interest rates. The model endogenizes agents' decisions on consumption and investments with short and long term horizons. There are two production technologies that generate a timevarying market price of risk: one that is short term and fully reversible, and one that is equivalent to a long term timetobuild technology. The paper shows that the ratio of long to short term capital invested in these technologies is a key factor that influences the term structure and provides specific formulas for the equilibrium real short interest rate, bond prices, and consumption dynamics that are functions of this ratio. The model is calibrated with U.S. data from 1970 to 2007 using Simulated Method of Moments and captures realistic means and volatilities of consumption, investments and real short term, and long term interest rates.
OIL PRICES AND LONGRUN RISK
, 2011
"... I show that relative levels of aggregate consumption and personal oil consumption provide an excellent proxy for oil prices, and that high oil prices predict low future aggregate consumption growth. Motivated by these facts, I add an oil consumption good to the longrun risk model of Bansal and Yaro ..."
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Cited by 1 (0 self)
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I show that relative levels of aggregate consumption and personal oil consumption provide an excellent proxy for oil prices, and that high oil prices predict low future aggregate consumption growth. Motivated by these facts, I add an oil consumption good to the longrun risk model of Bansal and Yaron [2004] to study the asset pricing implications of observed changes in the dynamic interaction of consumption and oil prices. Empirically I observe that, compared to the first half of my 1987 2010 sample, oil consumption growth in the last 10 years is unresponsive to levels of oil prices, creating an decrease in the meanreversion of oil prices, and an increase in the persistence of oil price shocks. The model implies that the change in the dynamics of oil consumption generates increased systematic risk from oil price shocks due to their increased persistence. However, persistent oil prices also act as a counterweight for shocks to expected consumption growth, with high expected growth creating high expectations of future oil prices which in turn slow down growth. The combined effect is to reduce overall consumption risk and lower the equity premium. The model also predicts that these changes affect the riskiness of of oil futures contracts, and combine to create a hump shaped
By
, 2011
"... The effect of oil price and currency volatility on the stock price of oil and gas companies in South Africa A Research Report Presented to the ..."
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The effect of oil price and currency volatility on the stock price of oil and gas companies in South Africa A Research Report Presented to the
Finance
"... I show that relative levels of aggregate consumption and personal oil consumption provide anexcellent proxy for oil prices, and that high oil prices predict low future aggregate consumptiongrowth. Motivated by these facts, I add an oil consumption good to the longrun risk model of Bansal and Yaron ..."
Abstract
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I show that relative levels of aggregate consumption and personal oil consumption provide anexcellent proxy for oil prices, and that high oil prices predict low future aggregate consumptiongrowth. Motivated by these facts, I add an oil consumption good to the longrun risk model of Bansal and Yaron [2004] to study the asset pricing implications of observed changes in the dynamicinteraction of consumption and oil prices. Empirically I observe that, compared to the rst half of my1987 2010 sample, oil consumption growth in the last 10 years is unresponsive to levels of oil prices,creating an decrease in the meanreversion of oil prices, and an increase in the persistence of oil priceshocks. The model implies that the change in the dynamics of oil consumption generates increasedsystematic risk from oil price shocks due to their increased persistence. However, persistent oil pricesalso act as a counterweight for shocks to expected consumption growth, with high expected growthcreating high expectations of future oil prices which in turn slow down growth. The combined eectis to reduce overall consumption risk and lower the equity premium. The model also predicts thatthese changes aect the riskiness of of oil futures contracts, and combine to create a hump shapedterm
State Price Density Estimated from Commodity Derivatives and Its Relevant Economic Implications
, 2009
"... I nonparametrically estimate probability densities under the risk neutral measure and state price densities (SPDs) of the crude oil market using a multivariate locally linear method conditional on the slope and volatility of futures. This is one of
rst studies providing market participants expectat ..."
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I nonparametrically estimate probability densities under the risk neutral measure and state price densities (SPDs) of the crude oil market using a multivariate locally linear method conditional on the slope and volatility of futures. This is one of
rst studies providing market participants expectation and preference in the commodity market and it supplements the existent literatures which focus on index options or most recently on interest rate derivatives. Firstly I
nd that risk neutral densities in the crude oil market signi
cantly deviate from lognormal distribution and can be either negatively or positively skewed depending on maturities, which is di¤erent with the index options and interest rate cap. Secondly I
nd SPDs display a Ushape and signi cantly depend on the volatility level of the futures rather than if the crude oil futures market is in backwardation or contango: During the period of low volatility, the Ushape is tighter, market participants assign higher values to extreme returns than in high volatility periods. Thirdly by comparing risk neutral densities and SPDs before and during 20072008, I also detect that the recent unprecedented price spike is associated with unusual shift of investors expectation.
Copenhagen Business School and Ecole Polytechnique Fédérale de Lausanne
"... Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasianalytical prices of options on futures contracts, ..."
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Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasianalytical prices of options on futures contracts, and dynamics of the futures curve in terms of a lowdimensional affine state vector. We estimate the model on NYMEX crude oil derivatives using an extensive panel data set of 45,517 futures prices and 233,104 option prices, spanning 4082 business days. We find strong evidence for two predominantly unspanned volatility factors. (JEL G13) 1.