An Empirical Model Comparison for Valuing Crack Spread Options
AbstractIn 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 InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2010-01.
Length: 45 pages
Date of creation: Jan 2010
Date of revision:
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Crack Spread Options; Option Valuation; Co-integrated Underlyings;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
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- 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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