Arismendi Zambrano, Juan and Back, Janis and Prokopczuk, Marcel and Paschke, Raphael and Rudolf, Markus (2016) Seasonal Stochastic Volatility: Implications for the pricing of commodity options. Journal of Banking and Finance, 66. pp. 53-65. ISSN 0378-4266

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Abstract

Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed-form option valuation formulas are derived. We then 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) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.

Item Type:	Article
Additional Information:	This is the postprint version of the published article, which is available at https://doi.org/10.1016/j.jbankfin.2016.02.001
Keywords:	Commodities; Seasonality; Stochastic volatility; Options pricing; Natural gas; Corn;
Academic Unit:	Faculty of Science and Engineering > Research Institutes > Hamilton Institute
Item ID:	10206
Identification Number:	https://doi.org/10.1016/j.jbankfin.2016.02.001
Depositing User:	Juan Arismendi Zambrano
Date Deposited:	12 Nov 2018 14:46
Journal or Publication Title:	Journal of Banking and Finance
Publisher:	Elsevier
Refereed:	Yes
URI:	https://www.sciencedirect.com/
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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