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Seasonality and the Valuation of Commodity Options

Author

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  • Janis Back

    (WHU - Otto Beisheim School of Management)

  • Marcel Prokopczuk

    (ICMA Centre, Henley Business School, University of Reading)

  • Markus Rudolf

    (WHU - Otto Beisheim School of Management)

Abstract

Price movements in many commodity markets exhibit significant seasonal patterns. In this paper, we study the effects of seasonal volatility on models' option pricing performance. In terms of options pricing, a deterministic seasonal component at the price level can be neglected. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean and heating oil 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 and yields more improvement in valuation accuracy than increasing the number of stochastic factors.

Suggested Citation

  • Janis Back & Marcel Prokopczuk & Markus Rudolf, 2010. "Seasonality and the Valuation of Commodity Options," ICMA Centre Discussion Papers in Finance icma-dp2010-08, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2010-08
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    File URL: http://www.icmacentre.ac.uk/files/discussion-papers/dp201008.pdf
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    More about this item

    Keywords

    Commodities; Seasonality; Options Pricing;
    All these keywords.

    JEL classification:

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

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