Evaluation of different stochastic processes for the
convenience yield for
Site of the project:
1102 BD Amsterdam
start of the project:
In February 2008 the
Thesis has been appeared
presentation has been given.
The Master project has been finished in July 2008
by the completion of the
and a final
has been given.
For working address etc. we refer to our alumnipage.
Summary of the master project:
Nowadays, traders calibrate the so-called convenience yield (CY) via
data every two days, using the forward price. The convenience yield is
benefit or premium associated with holding an underlying product or
good. Sometimes, due to irregular market movements such as an inverted
market, the holding of an underlying good or security may become more
profitable than owning the contract or derivative instrument, due to
relative scarcity versus high demand. An example would be purchasing
bales of oil rather than future contracts. Should there be a sudden
and the demand for oil increases, the difference between the first
price of the oil versus the price after the shock would be the
yield. This is seen in the market nowadays.
The market shows however that the CY behaves stochastically and has a
mean-reversion property. In the literature the CY often follows an
Ornstein-Uhlenbeck process and is then calculated by means of a
filter. The disadvantage of this process is that the CY can become
which can result in cost and carry arbitrage possibilities. If the CY
a CIR model the negativity is not present. Again the CY is calculated
means of the Kalman filter. All results are applied on the crude oil
from a data set of three years. The aim of this project is to
Kalman filter and to numerically test both stochastic processes on the
oil data and compare the results. After this a third, novel, process
developed with the same properties (i.e. mean-reversion).
The contents of one barrel of crude oil
Market data for crude oil
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