Volatility and commodity price dynamics
Author(s)Pindyck, Robert S.
Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research.
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Commodity prices tend to be volatile, and volatility itself varies over time. changes in volatility can affect market variables by directly affecting the marginal value of storage, and by affecting a component of the total marginal cost of productions: the opportunity cost of exercising the option to produce the commodity now rather than waiting for more price information. I examine the role of volatility in short-run commodity market dynamics, as well as the determinants of volatility itself. Specifically, I develop a model describing the joint dynamics of inventories, spot and futures prices, and volatility, and estimate it using daily and weekly data for the petroleum complex: crude oil, heating oil, and gasoline.
MIT Center for Energy and Environmental Policy Research
MIT-CEEPR (Series) ; 01-007WP.