Campus Units

Economics

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

8-17-2015

Journal or Book Title

American Journal of Agricultural Economics

Volume

98

Issue

3

First Page or Article ID Number

707

Last Page

725

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.

JEL Classification

Q11, G13

Comments

This article is published as Hart, Chad E., Sergio H. Lence, Dermot J. Hayes, and Na Jin. "Price mean reversion, seasonality, and options markets." American Journal of Agricultural Economics 98, no. 3 (2015): 707-725. doi:https://doi.org/10.1093/ajae/aav045. Posted with permission.

Copyright Owner

American Journal of Agricultural Economics

Language

en

File Format

application/pdf

Published Version

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