MULTISCALE STOCHASTIC VOLATILITY MODEL FOR DERIVATIVES ON FUTURES

Jean-Pierre Fouque (), Yuri F. Saporito () and Jorge P. Zubelli ()
Additional contact information
Jean-Pierre Fouque: Department of Statistics and Applied Probability, University of California, Santa Barbara, 552 University Road, Santa Barbara, California 93106-3110, USA
Jorge P. Zubelli: IMPA (Instituto de Matemática Pura e Aplicada), Estrada Dona Castorina 110, Rio de Janeiro, Rio de Janeiro 22460-320, Brazil

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 07, 1-31

Abstract: In this paper, we present a new method for computing the first-order approximation of the price of derivatives on futures in the context of multiscale stochastic volatility studied in Fouque et al. (2011). It provides an alternative method to the singular perturbation technique presented in Hikspoors & Jaimungal (2008). The main features of our method are twofold: firstly, it does not rely on any additional hypothesis on the regularity of the payoff function, and secondly, it allows an effective and straightforward calibration procedure of the group market parameters to implied volatilities. These features were not achieved in previous works. Moreover, the central argument of our method could be applied to interest rate derivatives and compound derivatives. The only pre-requisite of our approach is the first-order approximation of the underlying derivative. Furthermore, the model proposed here is well-suited for commodities since it incorporates mean reversion of the spot price and multiscale stochastic volatility. Indeed, the model was validated by calibrating the group market parameters to options on crude-oil futures, and it displays a very good fit of the implied volatility.

Keywords: Stochastic volatility; perturbation method; options on futures; futures price; commodities (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024914500435
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:17:y:2014:i:07:n:s0219024914500435

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024914500435

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().