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- Title
The Performance of Jump Models to Price Commodity Options.
- Authors
Constant, Aka; Marie-Hélène, Gagnon; Gabriel J., Power
- Abstract
This article presents a new model to explain the commodity futures curve and price options on these futures. The model contains a jump in the futures returns, where the size of the jumps follows seasonal patterns. A quasi-analytical solution for the prices of call and put options is presented. The model is calibrated empirically using daily data and compared in and out of sample with popular benchmarks. The analysis shows that the proposed jump model outperforms standard benchmarks for seasonal commodities, and this out-performance is economically significant. More specifically, our analysis reveals that accounting for seasonality in the size of jumps for a seasonal commodity leads to a considerably better pricing of futures options and performs well to hedge and to predict the value-at-risk of a seasonal commodity option portfolio.
- Subjects
JUMP processes; COMMODITY futures; OPTIONS (Finance); EMPIRICAL research; VALUE at risk
- Publication
Journal of Derivatives, 2023, Vol 31, Issue 2, p101
- ISSN
1074-1240
- Publication type
Article
- DOI
10.3905/jod.2023.1.189