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The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices

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  • Chih-Chen Hsu

    (Feng Chia University)

  • An-Sing Chen

    (National Chung Cheng University)

  • Shih-Kuei Lin

    (National Chengchi University)

  • Ting-Fu Chen

    (National Chengchi University)

Abstract

This study analyzes affine styled-facts price dynamics of Henry Hub natural gas price by incorporating the price features of jump risk, and seasonality within stochastic volatility framework. Affine styled-facts dynamics has the advantage of being able to incorporate mean reversion (MR), stochastic volatility (SV), seasonality trends (S), and jump diffusion (J) in a standardized inclusive framework. Our main finding is that models that incorporate jumps significantly improve overall out-of-sample option pricing performance. The combined MRSVJS model provides the best fit of both daily gas price returns and the related cross section of option prices. Incorporating seasonal effects tend to provide more stable pricing ability, especially for the long-term option contracts.

Suggested Citation

  • Chih-Chen Hsu & An-Sing Chen & Shih-Kuei Lin & Ting-Fu Chen, 2017. "The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 819-848, April.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0569-x
    DOI: 10.1007/s11156-016-0569-x
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    More about this item

    Keywords

    Affine styled-facts price dynamics; Mean reversion; Seasonality; Jump risk; Natural gas options;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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