Price Mean Reversion, Seasonality, and Options Markets

19 Pages Posted: 15 Apr 2020

See all articles by Chad Hart

Chad Hart

Iowa State University - Center for Agriculture and Rural Development (CARD)

Sergio H. Lence

Iowa State University - Department of Economics

Dermot J. Hayes

Iowa State University

Na Jin

Discover Financial Services

Date Written: April 2016

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.

Keywords: Bayesian statistics, commodity markets, mean reversion, options, seasonality

Suggested Citation

Hart, Chad and Lence, Sergio H. and Hayes, Dermot J. and Jin, Na, Price Mean Reversion, Seasonality, and Options Markets (April 2016). American Journal of Agricultural Economics, Vol. 98, Issue 3, pp. 707-725, 2016, Available at SSRN: https://ssrn.com/abstract=3574953 or http://dx.doi.org/10.1093/ajae/aav045

Chad Hart (Contact Author)

Iowa State University - Center for Agriculture and Rural Development (CARD) ( email )

Ames, IA 50011
United States

Sergio H. Lence

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Dermot J. Hayes

Iowa State University

613 Wallace Road
Ames, IA 50011-2063
United States

Na Jin

Discover Financial Services

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