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Affine†Structure Models and the Pricing of Energy Commodity Derivatives

Author

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  • Ioannis Kyriakou
  • Nikos K. Nomikos
  • Nikos C. Papapostolou
  • Panos K. Pouliasis

Abstract

We consider a seasonal mean†reverting model for energy commodity prices with jumps and Heston†type stochastic volatility, and three nested models for comparison. By exploiting the affine form of the log†spot models, we develop a general valuation framework for futures and discrete arithmetic Asian options. We investigate five major petroleum commodities from Europe (Brent crude oil, gasoil) and US (light sweet crude oil, gasoline, heating oil) and analyse the effects of the competing fitted spot models in futures pricing, Asian options pricing and hedging. We find evidence that price jumps and stochastic volatility are important features of the petroleum price dynamics.

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  • Ioannis Kyriakou & Nikos K. Nomikos & Nikos C. Papapostolou & Panos K. Pouliasis, 2016. "Affine†Structure Models and the Pricing of Energy Commodity Derivatives," European Financial Management, European Financial Management Association, vol. 22(5), pages 853-881, November.
  • Handle: RePEc:bla:eufman:v:22:y:2016:i:5:p:853-881
    DOI: 10.1111/eufm.12071
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    References listed on IDEAS

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    Cited by:

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    2. Ioannis Kyriakou & Panos K. Pouliasis & Nikos C. Papapostolou & Nikos K. Nomikos, 2018. "Income uncertainty and the decision to invest in bulk shipping," European Financial Management, European Financial Management Association, vol. 24(3), pages 387-417, June.
    3. Gudkov, Nikolay & Ignatieva, Katja, 2021. "Electricity price modelling with stochastic volatility and jumps: An empirical investigation," Energy Economics, Elsevier, vol. 98(C).
    4. Brignone, Riccardo & Kyriakou, Ioannis & Fusai, Gianluca, 2021. "Moment-matching approximations for stochastic sums in non-Gaussian Ornstein–Uhlenbeck models," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 232-247.
    5. Fred Espen Benth, 2021. "Pricing of Commodity and Energy Derivatives for Polynomial Processes," Mathematics, MDPI, vol. 9(2), pages 1-30, January.

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