Analysis of the risk premium in the forward market for salmon

Fred Espen Benth; Anne Maria Eikeset; Simon Asher Levin; Wanjuan Ren

doi:10.1016/j.jcomm.2019.100122

Analysis of the risk premium in the forward market for salmon

Fred Espen Benth, Anne Maria Eikeset, Simon Asher Levin, Wanjuan Ren

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

We analyse forward prices observed at the Fishpool market, and propose a two-factor continuous-time stochastic process for modelling the time dynamics. The data analysis reveals that the two factors can be assumed to be a non-stationary compound Poisson process and a stationary continuous-time autoregressive dynamics, describing the bumps observed in the forward curves. We use the model to analyse the risk premium in the forward markets, and find a negative premium in the long end of the market which is in line with the theory of normal backwardation. However, contracts with short time to maturity have a risk premium with randomly changing sign, pointing towards a hedging pressure also induced by the demand-side of the market.

Original language	English (US)
Article number	100122
Journal	Journal of Commodity Markets
Volume	21
DOIs	https://doi.org/10.1016/j.jcomm.2019.100122
State	Published - Mar 2021

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

Keywords

Autoregressive models in continuous time
Futures prices
Salmon futures

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10.1016/j.jcomm.2019.100122

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title = "Analysis of the risk premium in the forward market for salmon",

abstract = "We analyse forward prices observed at the Fishpool market, and propose a two-factor continuous-time stochastic process for modelling the time dynamics. The data analysis reveals that the two factors can be assumed to be a non-stationary compound Poisson process and a stationary continuous-time autoregressive dynamics, describing the bumps observed in the forward curves. We use the model to analyse the risk premium in the forward markets, and find a negative premium in the long end of the market which is in line with the theory of normal backwardation. However, contracts with short time to maturity have a risk premium with randomly changing sign, pointing towards a hedging pressure also induced by the demand-side of the market.",

keywords = "Autoregressive models in continuous time, Futures prices, Salmon futures",

author = "Benth, {Fred Espen} and Eikeset, {Anne Maria} and Levin, {Simon Asher} and Wanjuan Ren",

note = "Funding Information: A.M.E. and S.A.L. acknowledge the project “Green Growth Based on Marine Resources: Ecological and Socio-Economic Constraints (GreenMAR) for funding by Nordforsk. Publisher Copyright: {\textcopyright} 2019",

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T1 - Analysis of the risk premium in the forward market for salmon

AU - Benth, Fred Espen

AU - Eikeset, Anne Maria

AU - Levin, Simon Asher

AU - Ren, Wanjuan

N1 - Funding Information: A.M.E. and S.A.L. acknowledge the project “Green Growth Based on Marine Resources: Ecological and Socio-Economic Constraints (GreenMAR) for funding by Nordforsk. Publisher Copyright: © 2019

PY - 2021/3

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N2 - We analyse forward prices observed at the Fishpool market, and propose a two-factor continuous-time stochastic process for modelling the time dynamics. The data analysis reveals that the two factors can be assumed to be a non-stationary compound Poisson process and a stationary continuous-time autoregressive dynamics, describing the bumps observed in the forward curves. We use the model to analyse the risk premium in the forward markets, and find a negative premium in the long end of the market which is in line with the theory of normal backwardation. However, contracts with short time to maturity have a risk premium with randomly changing sign, pointing towards a hedging pressure also induced by the demand-side of the market.

AB - We analyse forward prices observed at the Fishpool market, and propose a two-factor continuous-time stochastic process for modelling the time dynamics. The data analysis reveals that the two factors can be assumed to be a non-stationary compound Poisson process and a stationary continuous-time autoregressive dynamics, describing the bumps observed in the forward curves. We use the model to analyse the risk premium in the forward markets, and find a negative premium in the long end of the market which is in line with the theory of normal backwardation. However, contracts with short time to maturity have a risk premium with randomly changing sign, pointing towards a hedging pressure also induced by the demand-side of the market.

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Analysis of the risk premium in the forward market for salmon

Abstract

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