Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans

This paper sets up and estimates a continuous-time stochastic volatility model using panel data of soybean futures and options in an integrated time-series study. The model of commodity price dynamics is within the class of affine asset pricing models, and option prices are determined using a standard inversion of characteristic functions approach. Our modeling acknowledges that commodities exhibit seasonality patterns in both spot price level and volatility. The estimation method is based on a state space formulation of the model and a quasi maximum likelihood approach. Estimation results are obtained based on weekly observations of soybean futures prices and options prices from the Chicago Board of Trade in the period October 1984 to March 1999. The empirical results support the conceptual ideas in the theory of storage, but not the view that convenience yields behave like timing options. JEL Classification: G13, C00