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Affine‐Structure Models and the Pricing of Energy Commodity Derivatives
Author(s) -
Kyriakou Ioannis,
Nomikos Nikos K.,
Papapostolou Nikos C.,
Pouliasis Panos K.
Publication year - 2016
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12071
Subject(s) - futures contract , spot contract , heating oil , economics , volatility (finance) , affine transformation , brent crude , econometrics , crude oil , petroleum , financial economics , gasoline , mean reversion , valuation (finance) , convenience yield , forward price , commodity , stochastic volatility , west texas intermediate , mathematics , geology , petroleum engineering , finance , engineering , paleontology , pure mathematics , waste management
Abstract We consider a seasonal mean‐reverting model for energy commodity prices with jumps and Heston‐type stochastic volatility, and three nested models for comparison. By exploiting the affine form of the log‐spot models, we develop a general valuation framework for futures and discrete arithmetic Asian options. We investigate five major petroleum commodities from Europe (Brent crude oil, gasoil) and US (light sweet crude oil, gasoline, heating oil) and analyse the effects of the competing fitted spot models in futures pricing, Asian options pricing and hedging. We find evidence that price jumps and stochastic volatility are important features of the petroleum price dynamics.