The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices
Chih-Chen Hsu (),
An-Sing Chen (),
Shih-Kuei Lin () and
Ting-Fu Chen ()
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Chih-Chen Hsu: Feng Chia University
An-Sing Chen: National Chung Cheng University
Shih-Kuei Lin: National Chengchi University
Ting-Fu Chen: National Chengchi University
Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 3, No 9, 819-848
Abstract This study analyzes affine styled-facts price dynamics of Henry Hub natural gas price by incorporating the price features of jump risk, and seasonality within stochastic volatility framework. Affine styled-facts dynamics has the advantage of being able to incorporate mean reversion (MR), stochastic volatility (SV), seasonality trends (S), and jump diffusion (J) in a standardized inclusive framework. Our main finding is that models that incorporate jumps significantly improve overall out-of-sample option pricing performance. The combined MRSVJS model provides the best fit of both daily gas price returns and the related cross section of option prices. Incorporating seasonal effects tend to provide more stable pricing ability, especially for the long-term option contracts.
Keywords: Affine styled-facts price dynamics; Mean reversion; Seasonality; Jump risk; Natural gas options (search for similar items in EconPapers)
JEL-codes: C52 E32 G13 Q02 (search for similar items in EconPapers)
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