Term Structure of Commodities Futures

The development of risk management methodologies for non-gaussian markets relies often on the assumption that the underlying market factors have a gaussian distribution. While advances have been made in the modeling of more general marginal distributions of the risk factors, the modeling of non-gaussian dependence structures is much less advanced. For commodities markets that often exhibit sudden changes from backwardation into contango (such as energy, agricultural products and metals), correlations or linear transformations of them fail to account for realistic transformations of forward curve convexity. This paper develops a model that overcomes this difficulty for scenario generation purposes. It also provides the “risk neutral” processes needed for derivatives pricing, answering two leading problems of the financial world (forecasting and pricing), and presents it in the context of other developments for commodity futures modeling.