An Analysis of the Fish Pool Market in the Context of Schwartz' (1997) Multifactor Model with Stochastic Convenience Yield

Using the popular Schwartz 97 two-factor approach, we study future contracts written on fresh farmed salmon, which have been actively traded at the Fish Pool Market in Norway since 2006. This approach features a stochastic convenience yield for the salmon spot price. We connect this approach with the classical literature on fish-farming and aquaculture using first principles, starting by modeling the aggregate salmon farming production process and modeling the demand using a Cobb-Douglas utility function for a representative consumer. The model is estimated by means of Kalman filtering, using a rich data set of contracts with different maturities traded at Fish Pool between 12/06/2006 and 22/03/2012. The results are then discussed in the context of other commodity markets, specifically live cattle which acts as a substitute.