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Modeling commodity prices under the CEV model

By Hélyette Geman and Yih-Fong Shih

Abstract

This paper 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 one 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, we find that the constant elasticity of variance exponent can efficiently account for the stochastic volatility observed after 2000 in commodity prices. Moreover, we exhibit that although mean- reverting processes well captured the pattern of commodity prices prevailing before 2000, they do not apply to the recent past

Topics: ems
Publisher: Institutional Investor Inc.
Year: 2009
OAI identifier: oai:eprints.bbk.ac.uk.oai2:1944
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