Affineâ€ Structure Models and the Pricing of Energy Commodity Derivatives
Nikos K. Nomikos,
Nikos Papapostolou () and
Panos K. Pouliasis
European Financial Management, 2016, vol. 22, issue 5, 853-881
We consider a seasonal meanâ€ reverting model for energy commodity prices with jumps and Hestonâ€ type stochastic volatility, and three nested models for comparison. By exploiting the affine form of the logâ€ spot models, we develop a general valuation framework for futures and discrete arithmetic Asian options. We investigate five major petroleum commodities from Europe (Brent crude oil, gasoil) and US (light sweet crude oil, gasoline, heating oil) and analyse the effects of the competing fitted spot models in futures pricing, Asian options pricing and hedging. We find evidence that price jumps and stochastic volatility are important features of the petroleum price dynamics.
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