An Empirical Model Comparison for Valuing Crack Spread Options

Steffen Mahringer and Marcel Prokopczuk (prokopczuk@fcm.uni-hannover.de)
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Steffen Mahringer: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: In this paper, we investigate the pricing of crack spread options. The special focus is laid on the question, of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast the bivariate GARCH volatility model for co-integrated underlyings of Duan and Pliska (2004), with the alternative of modeling the crack spread directly. Conducting an extensive empirical analysis of crude oil/heating oil and crude oil/gasoline crack spread options traded on the New York Mercantile Exchange, the more simplistic univariate approach is found to be superior with respect to option pricing performance.

Keywords: Crack Spread Options; Option Valuation; Co-integrated Underlyings (search for similar items in EconPapers)
JEL-codes: C50 G13 Q40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-01
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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Journal Article: An empirical model comparison for valuing crack spread options (2015)
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