IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v336y2024i1d10.1007_s10479-022-05059-7.html
   My bibliography  Save this article

Co-movements, option pricing and risk management: an application to WTI versus Brent spread options

Author

Listed:
  • Domenico De Giovanni

    (University of Calabria)

  • Arturo Leccadito

    (University of Calabria
    LFIN/LIDAM)

  • Debora Loccisano

    (Carleton University)

Abstract

Co-moments of asset returns play a major role in financial contagion during crises. We study the properties of a particular specification of the generalized bivariate normal distribution which allows for co-volatility and co-skewness. With this probability distribution, formulae for single-name and exchange options can be evaluated quickly since they are based on one-dimensional integrals. We provide a very precise approximation formula for spread option prices and derive the corresponding greeks. We perform a day-to-day re-estimation of the probability distribution on a dataset of WTI vs Brent spread options, showing the ability of this specification to capture the salient empirical features observed in the market. Finally, we show the impact of co-movements on portfolio risk management.

Suggested Citation

  • Domenico De Giovanni & Arturo Leccadito & Debora Loccisano, 2024. "Co-movements, option pricing and risk management: an application to WTI versus Brent spread options," Annals of Operations Research, Springer, vol. 336(1), pages 1039-1061, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-022-05059-7
    DOI: 10.1007/s10479-022-05059-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-022-05059-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-022-05059-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-022-05059-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.