Details
| Original language | English |
|---|---|
| Pages (from-to) | 273-290 |
| Number of pages | 18 |
| Journal | Journal of Banking and Finance |
| Volume | 37 |
| Issue number | 2 |
| Publication status | Published - 1 Feb 2013 |
| Externally published | Yes |
Abstract
Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.
Keywords
- Commodities, Options pricing, Seasonality
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. 37, No. 2, 01.02.2013, p. 273-290.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Seasonality and the valuation of commodity options
AU - Back, Janis
AU - Prokopczuk, Marcel
AU - Rudolf, Markus
PY - 2013/2/1
Y1 - 2013/2/1
N2 - Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.
AB - Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.
KW - Commodities
KW - Options pricing
KW - Seasonality
UR - http://www.scopus.com/inward/record.url?scp=84869861844&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2012.08.025
DO - 10.1016/j.jbankfin.2012.08.025
M3 - Article
AN - SCOPUS:84869861844
VL - 37
SP - 273
EP - 290
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
IS - 2
ER -