Commodity and Asset Pricing Models: An Integration

Gonzalo Cortazar, Ivo Kovacevic, Eduardo S. Schwartz

NBER Working Paper No. 19167
Issued in June 2013
NBER Program(s):   AP

We present a simple methodology that integrates commodity and asset pricing models. Given current evidence on the financialization of commodity markets, valuable information about commodity risk premiums can be extracted from asset pricing models and used to substantially improve the estimates of expected spot prices provided by current commodity price models. The methodology can be used with any pair of commodity and asset pricing models. An implementation of the methodology is presented using the Schwartz and Smith (2000) two-factor commodity price model and the CAPM. Reasonable expected spot prices are obtained without negative consequences in the model's fit to futures prices.

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Document Object Identifier (DOI): 10.3386/w19167

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