 Jumps and stochastic volatility in crude oil prices and advances in average option pricingIoannis Kyriakou, Panos Pouliasis and Nikos Papapostolou () Quantitative Finance, 2016, vol. 16, issue 12, 1859-1873 Abstract: Crude oil derivatives form an important part of the global derivatives market. In this paper, we focus on Asian options which are favoured by risk managers being effective and cost-saving hedging instruments. The paper has both empirical and theoretical contributions: we conduct an empirical analysis of the crude oil price dynamics and develop an accurate pricing set-up for arithmetic Asian options with discrete and continuous monitoring featuring stochastic volatility and discontinuous underlying asset price movements. Our theoretical contribution is applicable to various commodities exhibiting similar stylized properties. We here estimate the stochastic volatility model with price jumps as well as the nested model with omitted jumps to NYMEX WTI futures vanilla options. We find that price jumps and stochastic volatility are necessary to fit options. Despite the averaging effect, we show that Asian options remain sensitive to jump risk and that ignoring the discontinuities can lead to substantial mispricings. Date: 2016 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:16:y:2016:i:12:p:1859-1873 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2016.1211798 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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