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Seasonality and the valuation of commodity options

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  • Back, Janis
  • Prokopczuk, Marcel
  • Rudolf, Markus

Abstract

Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.

Suggested Citation

  • Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:273-290
    DOI: 10.1016/j.jbankfin.2012.08.025
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    Cited by:

    1. Date, Paresh & Mamon, Rogemar & Tenyakov, Anton, 2013. "Filtering and forecasting commodity futures prices under an HMM framework," Energy Economics, Elsevier, vol. 40(C), pages 1001-1013.
    2. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2015. "Electricity derivatives pricing with forward-looking information," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 34-57.
    3. repec:eee:jocoma:v:13:y:2019:i:c:p:16-29 is not listed on IDEAS
    4. Diewald, Laszlo & Prokopczuk, Marcel & Wese Simen, Chardin, 2015. "Time-variations in commodity price jumps," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 72-84.
    5. Arismendi, Juan C. & Back, Janis & Prokopczuk, Marcel & Paschke, Raphael & Rudolf, Markus, 2016. "Seasonal Stochastic Volatility: Implications for the pricing of commodity options," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 53-65.
    6. repec:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0569-x is not listed on IDEAS
    7. Spodniak, Petr & Bertsch, Valentin, 2017. "Determinants of power spreads in electricity futures markets: A multinational analysis," Papers WP580, Economic and Social Research Institute (ESRI).
    8. repec:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0638-9 is not listed on IDEAS
    9. Farkas, Walter & Gourier, Elise & Huitema, Robert & Necula, Ciprian, 2017. "A two-factor cointegrated commodity price model with an application to spread option pricing," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 249-268.
    10. Zakić, Vladimir & Kovačević, Vlado & Ivkov, Ivana & Mirović, Vera, 2014. "Importance Of Public Warehouse System For Financing Agribusiness Sector," Economics of Agriculture, Institute of Agricultural Economics, vol. 61(4), pages 1-15, December.
    11. Mat Rahim, Siti Rohaya, 2014. "Asymmetric Cointegration: Barley and Crude Oil Price in United States," MPRA Paper 58447, University Library of Munich, Germany.
    12. Anh Ngoc Lai & Constantin Mellios, 2016. "Valuation of commodity derivatives with an unobservable convenience yield," Post-Print halshs-01183166, HAL.

    More about this item

    Keywords

    Commodities; Seasonality; Options pricing;

    JEL classification:

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

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