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Pricing and calibration of the futures options market: A unified approximation
Author(s) -
Lian Xiaotong,
Song Yingda
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22206
Subject(s) - futures contract , constant elasticity of variance model , leverage (statistics) , economics , econometrics , markov chain , valuation of options , futures market , elasticity (physics) , calibration , mathematical economics , mathematics , financial economics , volatility (finance) , stochastic volatility , sabr volatility model , physics , statistics , thermodynamics
The constant elasticity of variance (CEV) model is widely used in modeling commodity futures prices, but it may not perform well in calibrating corresponding futures options. We consider two variations of the CEV model, that is, CEV with jumps and CEV with regime switching, and compare their performance in calibrating the Chinese futures options market. In particular, we propose a unified framework for pricing American futures options by combining the continuous‐time Markov chain approximation and the dynamic programming method. Results show that the inverse leverage effect in the soybean meal options market can be better described by the CEV regime‐switching model.