Equilibrium Forward Curves for Commodities

  title={Equilibrium Forward Curves for Commodities},
  author={Bryan R. Routledge and Duane J. Seppi and Chester Spatt},
We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option’s value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of… CONTINUE READING
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