Structure and Behavior of Commodities Markets

Rod Carvalho July 1st, 2007

If you are interested in commodities trading, I recommend you take a look at this pretty interesting presentation, “Structure and Behavior of Commodities Markets” (.pdf file - 1.47 MB), by Dr. David Eliezer, former chief quant of the commodities group at Goldman Sachs (he is also a Physics PhD). The presentation is almost 2 years old, but the content is far from being outdated.

Here’s the abstract:

We present a review of those features of the commodities markets which distinguish them from those of other financial assets. These features are, principally, the cost, and in particular the physical limits on storage and transport, the fluctuations of the market inventory of commodities, the inability to short the spot commodity, and the feedstock and substitution relations between one commodity and another. These present novel challenges for accurate stochastic modeling, which has not yet drawn attention enough from the academic community to go beyond first attempts, often borrowed from other fields such as fixed income. By elucidating those features which make commodities markets especially distinct, and far more interesting than other financial fields, we hope to stimulate greater academic interest in the field. We describe the terms of the fundamental instruments that trade in the markets, and give a sense of order of magnitude of the numbers, especially storage limits and production rates. We do not present any new results in this paper, nor any original work. There is very little mathematics, and our primary focus is on the qualitative empirical facts from the point of view of a dealer who wishes to calibrate a market to forward-looking market-implied data, rather than historical data.

(via Ernie Chan’s Quantitative Trading)

The original post on this topic can be found in my blog.