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Humps in the volatility structure of the crude oil futures market: New evidence

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  • Chiarella, Carl
  • Kang, Boda
  • Nikitopoulos, Christina Sklibosios
  • Tô, Thuy-Duong

Abstract

This paper analyses the volatility structure of commodity derivatives markets. The model encompasses hump-shaped, unspanned stochastic volatility, which entails a finite-dimensional affine model for the commodity futures curve and quasi-analytical prices for options on commodity futures. Using an extensive database of crude oil futures and futures options spanning 21years, we find the presence of hump-shaped, partially spanned stochastic volatility in the crude oil market. The hump shaped feature is more pronounced when the market is more volatile, and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes.

Suggested Citation

  • Chiarella, Carl & Kang, Boda & Nikitopoulos, Christina Sklibosios & Tô, Thuy-Duong, 2013. "Humps in the volatility structure of the crude oil futures market: New evidence," Energy Economics, Elsevier, vol. 40(C), pages 989-1000.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:989-1000
    DOI: 10.1016/j.eneco.2013.05.019
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    Cited by:

    1. Kang, Wensheng & Ratti, Ronald. A. & Vespignani, Joaquin, 2017. "Global commodity prices and global stock volatility shocks: effects across countries," Working Papers 2017-05, University of Tasmania, Tasmanian School of Business and Economics.
    2. Marc Bohmann & Vinay Patel, 2020. "Information Leakage in Energy Derivatives around News Announcements," Published Paper Series 2020-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Yuyang Cheng & Marcos Escobar-Anel & Zhenxian Gong, 2019. "Generalized Mean-Reverting 4/2 Factor Model," JRFM, MDPI, vol. 12(4), pages 1-21, October.
    4. Benjamin Cheng & Christina Sklibosios Nikitopoulos & Erik Schlögl, 2019. "Interest rate risk in long‐dated commodity options positions: To hedge or not to hedge?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(1), pages 109-127, January.
    5. Vespignani, Joaquin & Kang, Wensheng & Ratti, Ronald, 2018. "Global Commodity Prices and Global Stock Volatility Shocks," MPRA Paper 84250, University Library of Munich, Germany.
    6. Kang, Wensheng & Ratti, Ronald A. & Vespignani, Joaquin L., 2019. "Revising the Impact of Global Commodity Prices and Global Stock Market Volatility Shocks: Effects across Countries," MPRA Paper 103035, University Library of Munich, Germany.
    7. Hilliard, Jimmy E. & Hilliard, Jitka, 2019. "A jump-diffusion model for pricing and hedging with margined options: An application to Brent crude oil contracts," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 137-155.
    8. Kang, Wensheng & Ratti, Ronald A. & Vespignani, Joaquin, 2020. "Global commodity prices and global stock market volatility shocks: Effects across countries," Journal of Asian Economics, Elsevier, vol. 71(C).
    9. Carl Chiarella & Boda Kang & Christina Sklibosios Nikitopoulos & Thuy‐Duong Tô, 2016. "The Return–Volatility Relation in Commodity Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(2), pages 127-152, February.
    10. Cheng, Benjamin & Nikitopoulos, Christina Sklibosios & Schlögl, Erik, 2018. "Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 148-166.
    11. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Empirical Hedging Performance on Long-Dated Crude Oil Derivatives," Research Paper Series 376, Quantitative Finance Research Centre, University of Technology, Sydney.
    12. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Empirical Pricing Performance in Long-Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?," Research Paper Series 367, Quantitative Finance Research Centre, University of Technology, Sydney.
    13. Zhuoqi Teng & Renhong Wu & Yugang He & Anibal Coronel, 2023. "Swings in Crude Oil Valuations: Analyzing Their Bearing on China’s Stock Market Returns amid the COVID-19 Pandemic Upheaval," Discrete Dynamics in Nature and Society, Hindawi, vol. 2023, pages 1-10, June.
    14. Kang, Boda & Nikitopoulos, Christina Sklibosios & Prokopczuk, Marcel, 2020. "Economic determinants of oil futures volatility: A term structure perspective," Energy Economics, Elsevier, vol. 88(C).
    15. He, Huizi & Sun, Mei & Gao, Cuixia & Li, Xiuming, 2021. "Detecting lag linkage effect between economic policy uncertainty and crude oil price: A multi-scale perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 580(C).
    16. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Hedging Futures Options with Stochastic Interest Rates," Research Paper Series 375, Quantitative Finance Research Centre, University of Technology, Sydney.
    17. Lorenz Schneider & Bertrand Tavin, 2018. "Seasonal Stochastic Volatility and the Samuelson Effect in Agricultural Futures Markets," Papers 1802.01393, arXiv.org, revised Nov 2018.
    18. Bertrand Tavin & Lorenz Schneider, 2018. "From the Samuelson volatility effect to a Samuelson correlation effect : An analysis of crude oil calendar spread options," Post-Print hal-02311970, HAL.
    19. Schneider, Lorenz & Tavin, Bertrand, 2018. "From the Samuelson volatility effect to a Samuelson correlation effect: An analysis of crude oil calendar spread options," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 185-202.
    20. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2015. "Pricing of Long-dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates," Research Paper Series 366, Quantitative Finance Research Centre, University of Technology, Sydney.
    21. Benjamin Tin Chun Cheng, 2017. "Pricing and Hedging of Long-Dated Commodity Derivatives," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2017, January-A.
    22. repec:uts:finphd:37 is not listed on IDEAS

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    More about this item

    Keywords

    Commodity derivatives; Crude oil derivatives; Unspanned stochastic volatility; Hump-shaped volatility; Pricing; Hedging;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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