Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 The Basics of Storable Commodity Modeling
- 3 High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing
- 4 The Empirical Performance of the Two-Factor Storage Model
- 5 Stochastic Fundamental Volatility, Speculation, and Commodity Storage
- 6 The Pricing of Seasonal Commodities
- 7 The Dynamics of Carbon Markets
- 8 The Structural Modeling of Non-Storables: Electricity
- References
- Author Index
- Subject Index
8 - The Structural Modeling of Non-Storables: Electricity
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 The Basics of Storable Commodity Modeling
- 3 High-Frequency Price Dynamics for Continuously Produced Commodities in a Two-Factor Storage Economy: Implications for Derivatives Pricing
- 4 The Empirical Performance of the Two-Factor Storage Model
- 5 Stochastic Fundamental Volatility, Speculation, and Commodity Storage
- 6 The Pricing of Seasonal Commodities
- 7 The Dynamics of Carbon Markets
- 8 The Structural Modeling of Non-Storables: Electricity
- References
- Author Index
- Subject Index
Summary
Introduction
I now turn attention from storable commodities to non-storable ones. There are many important non-storable commodities, including electricity, weather, and shipping, that are actively traded on spot, forward, and derivatives markets.
By their very nature, non-storable commodities present fewer modeling challenges than storable ones. The very fact that they are not storable breaks the intertemporal linkages that necessitate the use of computationally intensive recursive techniques such as those utilized in the previous chapters. Storability means that every decision today must be made with an eye on tomorrow, and the tomorrow after that, and ad infinitum. In contrast, non-storable commodities can be modeled myopically, instant by instant, because in the absence of storage, current decisions do not affect tomorrow's economic opportunities. This lack of the need to look forward and consider the implications of current decisions on decision makers' future opportunity sets dramatically reduces the complexity of the modeler's task.
Structural models are eminently feasible for some commodities and, indeed, not only can these models be used to derive testable implications about the behavior of the prices of such commodities, they can also be used to price derivatives. In particular, two commodities with very transparent fundamentals – electricity and weather – are very well suited to structural models. Other non-storable commodities, notably shipping, can be modeled structurally, but the inputs necessary to calibrate these models and to use them for real-world derivatives pricing are not readily observable, as is the case for weather and power.
- Type
- Chapter
- Information
- Commodity Price DynamicsA Structural Approach, pp. 181 - 216Publisher: Cambridge University PressPrint publication year: 2011