Price Mean Reversion, Seasonality, and Options Markets

Chad Hart, Sergio Lence, Dermot Hayes and Na Jin

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Options on agricultural commodities with maturities exceeding one year seldom trade. One possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot-price levels can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs. The model proposed here incorporates mean reversion in spot-price levels and includes a correction for seasonality. Mean reversion and seasonality are both observed in the soybean market. The empirical analysis lends strong support to the model.

Date: 2015-08-17
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Related works:
Journal Article: Price Mean Reversion, Seasonality, and Options Markets (2016)
Working Paper: Price Mean Reversion, Seasonality, and Options Markets (2015)
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