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A multi-factor jump-diffusion model for commodities

[Zeitschriftenartikel]

Crosby, John

Zitationshinweis

Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):http://nbn-resolving.de/urn:nbn:de:0168-ssoar-221019

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Abstract In this paper, we develop an arbitrage-free model for the pricing of commodity derivatives. The model generates futures (or forward) commodity prices consistent with any initial term structure. The model is consistent with mean reversion in commodity prices and also generates stochastic convenience yields. Our model is a multi-factor jump-diffusion model, one specification of which allows the prices of long-dated futures contracts to jump by smaller magnitudes than short-dated futures contracts, which, to our knowledge, is a feature that has not previously appeared in the literature, in spite of it being in line with stylised empirical observations (especially for energy-related commodities). Our model also allows for stochastic interest-rates. The model produces semi-analytic solutions for standard European options, which enable option prices to be evaluated in typically about 1/50th of a second (depending upon parameter values and the required accuracy). This opens the possibility to calibrate the model parameters by deriving implied parameters from the market prices of options. We perform such a calibration on crude oil options and show that, allowing long-dated futures contracts to jump by smaller magnitudes than short-dated contracts, gives a greatly enhanced fit.
Klassifikation Allgemeines, spezielle Theorien und "Schulen", Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Methode Grundlagenforschung
Freie Schlagwörter Commodity options; Commodity derivatives; Jump diffusion; Mean reversion
Sprache Dokument Englisch
Publikationsjahr 2008
Seitenangabe S. 181-200
Zeitschriftentitel Quantitative Finance, 8 (2008) 2
DOI http://dx.doi.org/10.1080/14697680701253021
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)
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