Journal of Energy Markets

Integrating multiple commodities in a model of stochastic price dynamics

Raphael Paschke, Marcel Prokopczuk


In this paper we develop a multi-factor model for the joint dynamics of related commodity spot prices in continuous time. We contribute to the existing literature by simultaneously considering various commodity markets in a single, consistent model and, through its application, demonstrate the economic significance of our approach. Employing an essential affine model structure, we allow for rich dependencies among the latent factors and, thus, the commodity prices. The cointegrated behavior of the different spot price dynamics is explicitly taken into account.We apply the Kalman filter methodology to estimate the model for crude oil, heating oil and gasoline futures contracts. Empirically, we are able to identify a common non-stationary equilibrium factor, driving the long-term price behavior, and stationary factors affecting all three markets in a common way. Additionally, we identify factors that only impact on subsets of the commodities considered. To demonstrate the economic consequences of our integrated approach, we evaluate the investment in a refinery from a financial management perspective and compare the results with an approach neglecting the co-movement of prices. This negligence leads to radical changes in the project's assessment.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here