Convenience Yield

Understanding the Commodity Futures Term Structure Through Signatures ArXiv ID: 2503.00603 “View on arXiv” Authors: Unknown Abstract Signature methods have been widely and effectively used as a tool for feature extraction in statistical learning methods, notably in mathematical finance. They lack, however, interpretability: in the general case, it is unclear why signatures actually work. The present article aims to address this issue directly, by introducing and developing the concept of signature perturbations. In particular, we construct a regular perturbation of the signature of the term structure of log prices for various commodities, in terms of the convenience yield. Our perturbation expansion and rigorous convergence estimates help explain the success of signature-based classification of commodities markets according to their term structure, with the volatility of the convenience yield as the major discriminant. ...

A multi-factor model for improved commodity pricing: Calibration and an application to the oil market ArXiv ID: 2501.15596 “View on arXiv” Authors: Unknown Abstract We present a new model for commodity pricing that enhances accuracy by integrating four distinct risk factors: spot price, stochastic volatility, convenience yield, and stochastic interest rates. While the influence of these four variables on commodity futures prices is well recognized, their combined effect has not been addressed in the existing literature. We fill this gap by proposing a model that effectively captures key stylized facts including a dynamic correlation structure and time-varying risk premiums. Using a Kalman filter-based framework, we achieve simultaneous estimation of parameters while filtering state variables through the joint term structure of futures prices and bond yields. We perform an empirical analysis focusing on crude oil futures, where we benchmark our model against established approaches. The results demonstrate that the proposed four-factor model effectively captures the complexities of futures term structures and outperforms existing models. ...