Campus Units

Economics

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

2015

Journal or Book Title

American Journal of Agricultural Economics

First Page or Article ID Number

1

Last Page

19

DOI

10.1093/ajae/aav045

Abstract

Options on agricultural commodities with maturities exceeding one year seldom trade. One possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot-price levels can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs. The model proposed here incorporates mean reversion in spot-price levels and includes a correction for seasonality. Mean reversion and seasonality are both observed in the soybean market. The empirical analysis lends strong support to the model.

Comments

This is a pre-copyedited, author-produced PDF of an article accepted for publication in American Journal of Agricultural Economics following peer review. The version of record is available online at: http://dx.doi.org/10.1093/ajae/aav045

Copyright Owner

The Authors

Language

en

File Format

application/pdf