On the Pricing of Storable Commodities

Brody, D C; Hughston, L P and Yang, X. 2022. On the Pricing of Storable Commodities. In: Dorje C Brody; L P Hughston and A Macrina, eds. Financial Informatics: An Information-Based Approach to Asset Pricing. Singapore: World Scientific Publishing Company. ISBN 9789811246487 [Book Section]

Pricing of Storable Commodities.pdf - Submitted Version
Available under License Creative Commons Attribution.

Download (221kB) | Preview

Abstract or Description

This paper introduces an information-based model for the pricing of storable commodities such as crude oil and natural gas. The model uses the concept of market information about future supply and demand as a basis for valuation. Physical ownership of a commodity is taken to provide a stream of convenience dividends equivalent to a continuous cash flow. The market filtration is assumed to be generated jointly by (i) current and past levels of the dividend rate, and (ii) partial information concerning the future of the dividend flow. The price of a commodity is the expectation under a suitable pricing measure of the totality of the discounted risk-adjusted future convenience dividend, conditional on the information provided by the market filtration. In the situation where the dividend rate is modelled by an Ornstein-Uhlenbeck process, the prices of options on commodities can be derived in closed form. The approach that we present can be applied to other assets that yield potentially negative effective cash flows, such as real estate, factories, refineries, mines, and power generating plants.

Item Type:

Book Section

Identification Number (DOI):



Commodity markets; commodity derivatives; crude oil; natural gas; convenience yield; information-based asset pricing; market microstructure

Departments, Centres and Research Units:



1 November 2021Accepted
1 February 2022Published

Item ID:


Date Deposited:

05 Jan 2022 09:22

Last Modified:

14 Feb 2022 16:04



View statistics for this item...

Edit Record Edit Record (login required)