Working Paper: NBER ID: w19167
Authors: Gonzalo Cortazar; Ivo Kovacevic; Eduardo S. Schwartz
Abstract: We present a simple methodology that integrates commodity and asset pricing models. Given current evidence on the financialization of commodity markets, valuable information about commodity risk premiums can be extracted from asset pricing models and used to substantially improve the estimates of expected spot prices provided by current commodity price models. The methodology can be used with any pair of commodity and asset pricing models. An implementation of the methodology is presented using the Schwartz and Smith (2000) two-factor commodity price model and the CAPM. Reasonable expected spot prices are obtained without negative consequences in the model's fit to futures prices.
Keywords: Commodity Pricing; Asset Pricing; Financialization
JEL Codes: G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financialization of commodity markets (G13) | change in how commodities are priced (G13) |
| financial sector's influence (G21) | alteration of price dynamics (C69) |
| asset pricing models (G19) | extraction of risk premiums (G11) |
| extraction of risk premiums (G11) | enhancement of reliability of expected spot price estimates (G13) |
| integration methodology (F02) | more accurate estimates of futures prices and expected spot prices (G13) |
| traditional commodity pricing models (G13) | unreasonable estimations of expected spot prices (G13) |
| risk premiums identified through asset pricing models (G12) | reliability of expected spot prices under physical measure (G13) |
| integration methodology (F02) | improved in-sample and out-of-sample fit of models (C52) |