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An Empirical Model Comparison for Valuing Crack Spread Options

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  • Steffen Mahringer

    (ICMA Centre, University of Reading)

  • Marcel Prokopczuk

    ()
    (ICMA Centre, University of Reading)

Abstract

In this paper, we investigate the pricing of crack spread options. The special focus is laid on the question, of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast the bivariate GARCH volatility model for co-integrated underlyings of Duan and Pliska (2004), with the alternative of modeling the crack spread directly. Conducting an extensive empirical analysis of crude oil/heating oil and crude oil/gasoline crack spread options traded on the New York Mercantile Exchange, the more simplistic univariate approach is found to be superior with respect to option pricing performance.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2010-01.

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Length: 45 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2010-01

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Related research

Keywords: Crack Spread Options; Option Valuation; Co-integrated Underlyings;

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Cited by:
  1. ROMBOUTS, Jeroen V. K. & STENTOFT, Lars & VIOLANTE, Francesco, 2012. "The value of multivariate model sophistication: an application to pricing Dow Jones Industrial Average options," CORE Discussion Papers 2012003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Wang, Yudong & Wu, Chongfeng, 2012. "Forecasting energy market volatility using GARCH models: Can multivariate models beat univariate models?," Energy Economics, Elsevier, vol. 34(6), pages 2167-2181.

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