Peer-Reviewed Journal Details
Mandatory Fields
Arismendi, JC;Back, J;Prokopczuk, M;Paschke, R;Rudolf, M
2016
May
Journal of Banking and Finance
Seasonal Stochastic Volatility: Implications for the pricing of commodity options
Published
1 ()
Optional Fields
AGRICULTURAL FUTURES CONVENIENCE YIELD CONTINGENT CLAIMS INTEREST-RATES MARKET PRICE RISK PREMIA VALUATION MODELS DYNAMICS DETERMINANTS
66
53
65
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. (C) 2016 Elsevier B.V. All rights reserved.
AMSTERDAM
0378-4266
10.1016/j.jbankfin.2016.02.001
Grant Details