Seasonal Stochastic Volatility: Implications for the pricing of commodity options
Juan Arismendi Zambrano (),
Marcel Prokopczuk (),
Raphael Paschke and
Journal of Banking & Finance, 2016, vol. 66, issue C, 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.
Keywords: G13; Commodities; Seasonality; Stochastic volatility; Options pricing; Natural gas; Corn (search for similar items in EconPapers)
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Working Paper: Seasonal Stochastic Volatility: Implications for the Pricing of Commodity Options (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:66:y:2016:i:c:p:53-65
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