Seasonal Stochastic Volatility: Implications for the Pricing of Commodity Options
Marcel Prokopczuk () and
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Janis Back: WHU - Otto Beisheim School of Management
Markus Rudolf: WHU - Otto Beisheim School of Management
ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading
Many commodity markets contain a strong seasonal component in volatility. In this paper, the importance of this seasonal behavior for the pricing of commodity options is analyzed. We propose a stochastic volatility model where the drift term of the variance process captures the observed seasonal pattern in volatility. This framework allows us to derive semi-closed-form pricing formulas for the valuation of options on commodity futures. In the main part of the paper, we empirically study the impact of the proposed seasonal stochastic volatility model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.
Keywords: Commodities; Seasonality; Stochastic volatility; Options pricing; Natural gas (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
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Journal Article: Seasonal Stochastic Volatility: Implications for the pricing of commodity options (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2011-16
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