Advanced Search
MyIDEAS: Login to save this article or follow this journal

Seasonality and the valuation of commodity options

Contents:

Author Info

  • Back, Janis
  • Prokopczuk, Marcel
  • Rudolf, Markus

Abstract

Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0378426612002646
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 273-290

as in new window
Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:273-290

Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Commodities; Seasonality; Options pricing;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  2. Peter Christoffersen & Kris Jacobs, 2003. "The Importance of the Loss Function in Option Valuation," CIRANO Working Papers 2003s-52, CIRANO.
  3. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
  4. Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, 08.
  5. Mihaela Manoliu & Stathis Tompaidis, 2002. "Energy futures prices: term structure models with Kalman filter estimation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 21-43.
  6. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
  7. Lo, Andrew W. (Andrew Wen-Chuan) & Wang, Jiang, 1959-, 1993. "Implementing option pricing models when asset returns are predictable," Working papers 3593-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  9. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-20, June.
  10. Nguyen, Vu-Nhat & Geman, Hélyette, 2005. "Soybean Inventory and Forward Curve Dynamics," Economics Papers from University Paris Dauphine 123456789/1937, Paris Dauphine University.
  11. Richter, Martin & Sørensen, Carsten, 2002. "Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans," Working Papers 2002-4, Copenhagen Business School, Department of Finance.
  12. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
  13. Hélyette Geman & Vu-Nhat Nguyen, 2005. "Soybean Inventory and Forward Curve Dynamics," Management Science, INFORMS, vol. 51(7), pages 1076-1091, July.
  14. Xuemin Yan, 2002. "Valuation of commodity derivatives in a new multi-factor model," Review of Derivatives Research, Springer, vol. 5(3), pages 251-271, October.
  15. Svetlana Borovkova & Helyette Geman, 2006. "Seasonal and stochastic effects in commodity forward curves," Review of Derivatives Research, Springer, vol. 9(2), pages 167-186, September.
  16. Darren L. Frechette, 1997. "The Dynamics of Convenience and the Brazilian Soybean Boom," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1108-1118.
  17. Dempster, M.A.H. & Medova, Elena & Tang, Ke, 2008. "Long term spread option valuation and hedging," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2530-2540, December.
  18. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  19. Karali, Berna & Thurman, Walter N., 2010. "Components of Grain Futures Price Volatility," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(2), August.
  20. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  21. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
  22. Jaime Casassus & Pierre Collin-Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
  23. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
  24. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  25. Paschke, Raphael & Prokopczuk, Marcel, 2010. "Commodity derivatives valuation with autoregressive and moving average components in the price dynamics," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2742-2752, November.
  26. Steen Koekebakker & Gudbrand Lien, 2004. "Volatility and Price Jumps in Agricultural Futures Prices—Evidence from Wheat Options," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1018-1031.
  27. Gareth W. Peters & Mark Briers & Pavel V. Shevchenko & Arnaud Doucet, 2011. "Calibration and filtering for multi factor commodity models with seasonality: incorporating panel data from futures contracts," Papers 1105.5850, arXiv.org.
  28. Bierbrauer, Michael & Menn, Christian & Rachev, Svetlozar T. & Truck, Stefan, 2007. "Spot and derivative pricing in the EEX power market," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3462-3485, November.
  29. Hilliard, Jimmy E. & Reis, Jorge, 1998. "Valuation of Commodity Futures and Options under Stochastic Convenience Yields, Interest Rates, and Jump Diffusions in the Spot," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 61-86, March.
  30. Anders B. Trolle & Eduardo S. Schwartz, 2009. "Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4423-4461, November.
  31. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  32. de Munnik, Jeroen F. J. & Schotman, Peter C., 1994. "Cross-sectional versus time series estimation of term structure models: empirical results for the Dutch bond market," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 997-1025, October.
  33. Doran, James S. & Ronn, Ehud I., 2008. "Computing the market price of volatility risk in the energy commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2541-2552, December.
  34. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Date, Paresh & Mamon, Rogemar & Tenyakov, Anton, 2013. "Filtering and forecasting commodity futures prices under an HMM framework," Energy Economics, Elsevier, vol. 40(C), pages 1001-1013.
  2. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Derivatives Pricing with Forward-Looking Information," Working Papers on Finance 1317, University of St. Gallen, School of Finance.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:273-290. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.