Commodity Asian option pricing and simulation in a 4-factor model with jump clusters

Riccardo Brignone (), Luca Gonzato () and Carlo Sgarra ()
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Riccardo Brignone: University of Freiburg
Luca Gonzato: University of Vienna
Carlo Sgarra: Politecnico di Milano

Annals of Operations Research, 2024, vol. 336, issue 1, No 9, 275-306

Abstract: Abstract Mean reversion, stochastic volatility, convenience yield and presence of jump clustering are well documented salient features of commodity markets, where Asian options are very popular. We propose a model which takes into account all these stylized features. We first state our model under the historical measure, then, after introducing a structure preserving change of measure, we provide a risk-neutral version of the same model and we show how to price geometric and arithmetic Asian options. To this end, we derive semi-closed formulas for the geometric Asian options price and develop a computationally efficient simulation scheme for the price process, allowing to price the arithmetic counterparts using control variate technique. Finally, we propose a simple econometric experiment to document presence of jump clusters in commodity prices and evaluate the performances of the proposed simulation scheme on some parameter sets calibrated on real data.

Keywords: Commodity derivatives; Multifactor affine stochastic volatility models; Self-exciting jumps; Simulation; Asian options (search for similar items in EconPapers)
JEL-codes: C15 C63 G13 Q02 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-022-05152-x

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