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Pricing Commodity Options When The Underlying Futures Price Exhibits Time-Varying Volatility

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  • Myers, Robert J.
  • Hanson, Steven D.

Abstract

This paper outlines a model for pricing options when the underlying futures pnce exhibits time-varying volatility. Futures price movements are characterized using a GARCH model. In an empirical application, the GARCH option pricing model predicts market premmms significantly better than the standard Black model, which assumes volatility is constant.

Suggested Citation

  • Myers, Robert J. & Hanson, Steven D., 1991. "Pricing Commodity Options When The Underlying Futures Price Exhibits Time-Varying Volatility," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271194, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea91:271194
    DOI: 10.22004/ag.econ.271194
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    References listed on IDEAS

    as
    1. Gordon, J. Douglas, 1985. "The Distribution of Daily Changes in Commodity Futures Prices," Technical Bulletins 156817, United States Department of Agriculture, Economic Research Service.
    2. Johnson, Herb & Shanno, David, 1987. "Option Pricing when the Variance Is Changing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 143-151, June.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Baillie, R.T. & Myers, R.J., 1989. "Modeling Commodity Price Distributions And Estimating The Optimal Futures Hedge," Papers 201, Columbia - Center for Futures Markets.
    5. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March.
    6. Baillie, Richard T. & Bollerslev, Tim, 1992. "Prediction in dynamic models with time-dependent conditional variances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 91-113.
    7. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    8. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    9. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    10. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    11. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

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