Details
| Original language | English |
|---|---|
| Pages (from-to) | 53-65 |
| Number of pages | 13 |
| Journal | Journal of Banking and Finance |
| Volume | 66 |
| Publication status | Published - May 2016 |
Abstract
Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed-form option valuation formulas are derived. We then empirically study the impact of the proposed Seasonal Stochastic Volatility Model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.
Keywords
- Commodities, Corn, Natural gas, Options pricing, Seasonality, Stochastic volatility
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Banking and Finance, Vol. 66, 05.2016, p. 53-65.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Seasonal Stochastic Volatility
T2 - Implications for the pricing of commodity options
AU - Arismendi, Juan C.
AU - Back, Janis
AU - Prokopczuk, Marcel
AU - Paschke, Raphael
AU - Rudolf, Markus
PY - 2016/5
Y1 - 2016/5
N2 - Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed-form option valuation formulas are derived. We then empirically study the impact of the proposed Seasonal Stochastic Volatility Model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.
AB - Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed-form option valuation formulas are derived. We then empirically study the impact of the proposed Seasonal Stochastic Volatility Model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.
KW - Commodities
KW - Corn
KW - Natural gas
KW - Options pricing
KW - Seasonality
KW - Stochastic volatility
UR - http://www.scopus.com/inward/record.url?scp=84959280735&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2016.02.001
DO - 10.1016/j.jbankfin.2016.02.001
M3 - Article
AN - SCOPUS:84959280735
VL - 66
SP - 53
EP - 65
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
ER -