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Analytically Pricing Commodity Futures Options Under Financialization With Stochastic Liquidity Risks

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  • Wenting Chen
  • Fangzhao Zhou
  • Xin‐Jiang He

Abstract

In this paper, we propose a liquidity‐adjusted pricing model in the context of commodity financialization, aiming at improving the pricing efficiency of commodity futures options. This model captures key characteristics of the real commodity market by integrating a basic two‐factor model with a financialization index and a market liquidity risk factor. Under this complicated four‐factor model, a closed‐form analytical solution for the price of commodity futures options is derived, which is then validated numerically. Through a preliminary empirical study, it is demonstrated that the current model surpasses other benchmarks, indicating the necessity of integrating both financialization and liquidity risks into the pricing of commodity futures options.

Suggested Citation

  • Wenting Chen & Fangzhao Zhou & Xin‐Jiang He, 2026. "Analytically Pricing Commodity Futures Options Under Financialization With Stochastic Liquidity Risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 46(6), pages 1154-1166, June.
    • Handle: RePEc:wly:jfutmk:v:46:y:2026:i:6:p:1154-1166
    DOI: 10.1002/fut.70103
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