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Article
Price Mean Reversion, Seasonality, and Options Markets
American Journal of Agricultural Economics
  • Chad Hart, Iowa State University
  • Sergio H Lence, Iowa State University
  • Dermot J. Hayes, Iowa State University
  • Na Jin, Discover FInancial Services
Document Type
Article
Publication Version
Accepted Manuscript
Publication Date
1-1-2015
DOI
10.1093/ajae/aav045
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.
Comments

This is a pre-copyedited, author-produced PDF of an article accepted for publication in American Journal of Agricultural Economics following peer review. The version of record is available online at: http://dx.doi.org/10.1093/ajae/aav045

Copyright Owner
The Authors
Language
en
File Format
application/pdf
Citation Information
Chad Hart, Sergio H Lence, Dermot J. Hayes and Na Jin. "Price Mean Reversion, Seasonality, and Options Markets" American Journal of Agricultural Economics (2015) p. 1 - 19
Available at: http://works.bepress.com/dermot_hayes/135/