Seasonality and the valuation of commodity options

Janis Back, Marcel Prokopczuk () and Markus Rudolf

Journal of Banking & Finance, 2013, vol. 37, issue 2, 273-290

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; Seasonality; Options pricing (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (34)

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Related works:
Working Paper: Seasonality and the Valuation of Commodity Options (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:2:p:273-290

DOI: 10.1016/j.jbankfin.2012.08.025

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