Commodity and Asset Pricing Models: An Integration
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.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Gonzalo Cortazar and Ivo Kovacevic acknowledge partial financial support from the Chilean governmental scientific agency Fondecyt of CONICYT and from the university center FINANCEUC of Pontificia Universidad Católica de Chile.