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Evidence of unspanned stochastic volatility in crude-oil market

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  • Razvan Tudor
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    Abstract

    The purpose of this paper is to conduct a comprehensive analysis of unspanned stochastic volatility in commodity markets with focus and empirical evidence on crude-oil market. Using crude-oil futures and options on futures data from New York Mercantile Exchange (NYMEX) there are presented model-free results that strongly suggest the presence of unspanned stochastic volatility in the crude-oil market. Sharp oil prices changes exert influence on macroeconomic activity in general and crude-oil industry in particular. The importance of the results is that they show the extent to which volatility risk is spanned by the futures contracts. The extent to which crude-oil futures contracts trading span volatility will indicate if options on futures are redundant securities or there is needed a mixed strategy combining both types of crude-oil market derivatives (futures and options) to fully hedge against volatility risk.

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    File URL: http://www.dofin.ase.ro/Working%20papers/Tudor%20Razvan/tudor.razvan.dissertation.pdf
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    Bibliographic Info

    Paper provided by Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB in its series Advances in Economic and Financial Research - DOFIN Working Paper Series with number 33.

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    Date of creation: Oct 2009
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    Handle: RePEc:cab:wpaefr:33

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    Keywords: unspanned stochastic volatility; oil market;

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    1. 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.
    2. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
    3. Litzenberger, Robert H & Rabinowitz, Nir, 1995. " Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 50(5), pages 1517-45, December.
    4. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-50, Carnegie Mellon University, Tepper School of Business.
    5. Anders B. Trolle & Eduardo S. Schwartz, 2006. "A General Stochastic Volatility Model for the Pricing and Forecasting of Interest Rate Derivatives," NBER Working Papers 12337, National Bureau of Economic Research, Inc.
    6. Elekdag, Selim & Lalonde, Rene & Laxton, Doug & Muir, Dirk & Pesenti, Paolo, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," CEPR Discussion Papers 6700, C.E.P.R. Discussion Papers.
    7. 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.
    8. Murray Carlson & Zeigham Khokher & Sheridan Titman, 2007. "Equilibrium Exhaustible Resource Price Dynamics," Journal of Finance, American Finance Association, vol. 62(4), pages 1663-1703, 08.
    9. Leonid Kogan & Dmitry Livdan & Amir Yaron, 2005. "Futures Prices in a Production Economy with Investment Constraints," NBER Working Papers 11509, National Bureau of Economic Research, Inc.
    10. 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.
    11. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
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