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Modeling Commodity Prices under the CEV Model

Helyette Geman and Yih Fong Shih
The Journal of Alternative Investments Winter 2009, 11 (3) 65-84; DOI: https://doi.org/10.3905/JAI.2009.11.3.065
Helyette Geman
is the director of the Commodity Finance Centre at Birkbeck, University of London, and ESSEC Business School.
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  • For correspondence: hgeman@hotmail.com
Yih Fong Shih
is a Ph.D. student at Birkbeck, University of London, London, U.K.
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  • For correspondence: yshih@ems.bbk.ac.uk
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Abstract

Deregulation of energy commodity markets in the last decade, together with the growth of world consumption and the attractive returns on commodities over the period 2000-2007, has generated a dramatic increase in trading volumes and, in turn, spikes and random changes in the volatility of commodity spot prices. This article introduces the constant elasticity of variance (CEV) model for commodity prices and examines its calibration to four strategic commodity trajectory prices over the period 1990-2007 by using a Generalized Method of Moments. Six other models are compared to the CEV model by performing a test of goodness-of-fit. Estimating the model for crude oil, coal, copper, and gold and comparing the results during the sub-periods 1990-1999 and 2000-2007 shows that the constant elasticity of variance exponent can efficiently account for the stochastic volatility observed after 2000 in commodity prices. Moreover, the article exhibits that although mean-reverting processes well captured the pattern of commodity prices prevailing before 2000, they do not apply to the recent past.

TOPICS: Commodities, statistical methods, financial crises and financial market history

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Vol. 11, Issue 3
Winter 2009
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Modeling Commodity Prices under the CEV Model
Helyette Geman, Yih Fong Shih
The Journal of Alternative Investments Dec 2008, 11 (3) 65-84; DOI: 10.3905/JAI.2009.11.3.065

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Modeling Commodity Prices under the CEV Model
Helyette Geman, Yih Fong Shih
The Journal of Alternative Investments Dec 2008, 11 (3) 65-84; DOI: 10.3905/JAI.2009.11.3.065
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  • Article
    • Abstract
    • REVIEW OF THE LITERATURE
    • THE PRICE BEHAVIOR OF CRUDE OIL, COPPER, COAL, AND GOLD
    • THE CEV MODEL AND ITS EXTENSIONS
    • THE ECONOMETRIC ANALYSIS
    • EMPIRICAL RESULTS
    • CONCLUSION
    • ENDNOTES
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