Review of Derivatives Research

, Volume 18, Issue 1, pp 75–93 | Cite as

Commodity derivative valuation under a factor model with time-varying market prices of risk

  • Andrés G. Mirantes
  • Javier Población
  • Gregorio Serna


It is well known that market prices of risk play an important role in commodity derivative valuation. There is an extensive literature showing that market prices of risk vary through time. Based on these results, a factor model, with two long- and short-term factors, with market prices of risk depending on these underlying asset factors is proposed and estimated, using data from crude oil, heating oil, unleaded gasoline and natural gas futures prices traded at NYMEX. The valuation results obtained with an extensive sample of commodity American options traded at NYMEX show that this model with time-varying market prices of risk outperforms standard models with constant market prices of risk.


Market price of risk Commodity prices Commodity derivatives Stochastic processes Kalman filter 

JEL Classification

C32 C51 C60 G13 


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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Andrés G. Mirantes
    • 1
  • Javier Población
    • 2
  • Gregorio Serna
    • 3
  1. 1.IES Juan del EnzinaLeónSpain
  2. 2.D.G.A. Supervisión, Banco de EspañaMadridSpain
  3. 3.Facultad de Ciencias Económicas y EmpresarialesUniversidad de AlcaláAlcalá de Henares, MadridSpain

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