 Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?Benjamin Cheng, Christina Nikitopoulos-Sklibosios () and Erik Schlogl Journal of Banking & Finance, 2018, vol. 95, issue C, 148-166 Abstract: Does modelling stochastic interest rates, beyond stochastic volatility, improve pricing performance on long-dated commodity derivatives? To answer this question, we consider futures price models for commodity derivatives that allow for stochastic volatility and stochastic interest rates and a correlation structure between the underlying variables. We examine the empirical pricing performance of these models on pricing long-dated crude oil derivatives. Estimating the model parameters from historical crude oil futures prices and option prices, we find that stochastic interest rate models improve pricing performance on long-dated crude oil derivatives, when the interest rate volatility is relatively high. Furthermore, increasing the model dimensionality does not tend to improve the pricing performance on long-dated crude oil option prices, but it matters for long-dated futures prices. We also find empirical evidence for a negative correlation between crude oil futures prices and interest rates that contributes to improving fit to long-dated crude oil option prices. Keywords: Futures options pricing; Stochastic interest rates; Correlations; Long-dated crude oil derivatives (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:95:y:2018:i:c:p:148-166 DOI: 10.1016/j.jbankfin.2017.05.012 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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