Commodity price dynamics and derivative valuation: a review (Q2862510)

This review starts with the empirically observed price behaviour of commodities. The corresponding economic rationals are discussed in Section 2. The authors first introduce backwardation and contango, and then discuss convenience yield. Thereafter, they introduce and discuss key characteristics of commodity prices, namely mean reversion, Samuelson effect, seasonality. Building on these ideas, the authors discuss models for the valuation of commodity derivatives in Section 3. They start with spot price models and then move on to models for the entire futures curve. They then discuss commodity derivative pricing models incorporating jumps, seasonality and stochastic volatility. Section 4 summarizes and presents future research questions.