Humps in the volatility structure of the crude oil futures market: New evidence

Chiarella, Carl; Kang, Boda; Nikitopoulos, Christina Sklibosios; To, Thuy Duong

doi:10.1016/j.eneco.2013.05.019

Cited by 30 publications

(32 citation statements)

References 35 publications

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“…This is critical because if there exists unspanned volatility in a given commodity, futures options are not redundant securities and they cannot be fully hedged using only the underlying futures contracts. Chiarella, Kang, Nikitopoulos, and Tô (2013) consider a commodity pricing model under the HJM framework. They demonstrate that the crude oil futures volatility structure is hump-shaped and thus allows increasing volatility at the short end of the implied volatility curve.…”

Section: Introductionmentioning

confidence: 99%

“…They demonstrate that the crude oil futures volatility structure is hump-shaped and thus allows increasing volatility at the short end of the implied volatility curve. However, in both papers from Trolle and Schwartz (2009b) and Chiarella et al (2013), a deterministic function of interest rate is used to discount the payout of the options to present. For short-term and medium-term options, assuming deterministic interest rates results in negligible pricing errors however for long-term option contracts this error is not well known and it may not be negligible.…”

Section: Introductionmentioning

confidence: 99%

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Pricing of Long-Dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates

2016

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Aiming to study pricing of long-dated commodity derivatives, this paper presents a class of models within the Heath, Jarrow, and Morton (1992) framework for commodity futures prices that incorporates stochastic volatility and stochastic interest rate and allows a correlation structure between the futures price process, the futures volatility process and the interest rate process. The functional form of the futures price volatility is specified so that the model admits finite dimensional realisations and retains affine representations, henceforth quasi-analytical European futures option pricing formulae can be obtained. A sensitivity analysis reveals that the correlation between the interest rate process and the futures price process has noticeable impact on the prices of long-dated futures options, while the correlation between the interest rate process and the futures price volatility process does not impact option prices. Furthermore, when interest rates are negatively correlated with futures prices then option prices are more sensitive to the volatility of interest rates, an effect that is more pronounced with longer maturity options.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Pricing of Long-Dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates

2016

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“…To gauge the contribution of the stochastic interest rate specifications to hedging long-dated option positions, we consider several hedge strategies including the hedge ratios derived from the deterministic interest rate Black (1976) model and the stochastic interest rate two-factor Rabinovitch (1989) model. We also introduce the factor hedging approach (see Clewlow and Strickland (2000) and Chiarella, Kang, Nikitopoulos, and Tô (2013)) which is well suited for hedging with more general multi-dimensional models and we validate the numerical efficiency of the approach.…”

Section: Introductionmentioning

confidence: 91%

“…Chiarella et al (2013) perform a simulation over a number of shocks instead of using a deterministic one-standard-deviation jumps. We have compared both methods and we do not find any noticeable difference between them in the present context, so we use one-standard-deviation up and down shocks for the sake of simplicity and computational efficiency7 We define the shorthanded notation of ( ) by and ( ) by .…”

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confidence: 99%

Hedging Futures Options with Stochastic Interest Rates

2016

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This paper presents a simulation study of hedging long-dated futures options, in the Rabinovitch (1989) model which assumes correlated dynamics between spot asset prices and interest rates. Under this model and when the maturity of the hedging instruments match the maturity of the option, forward contracts and futures contracts can hedge both the market risk and the interest rate risk of the options positions. When the hedge is rolled forward with shorter maturity hedging instruments, then bond contracts are additionally required to hedge the interest rate risk. This requirement becomes more pronounced for longer maturity contracts and amplifies as the interest rate volatility increases. Factor hedging ratios are also considered, which are suited for multi-dimensional models, and their numerical efficiency is validated.

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“…Using a mixed model of Copula and ARJI-GARCH, Chang [2] studied the asymmetric, time-varying dependence of oil spot and futures prices, and concluded that the ARJI-GARCH is a better choice for the analysis of non-continuous data than the traditional AR-GARCH model. In their study about the volatility structure of international oil futures prices, Chiarella et al, [3] discovered a Bell Curve in the price changes. In a study about the structural break between the oil spot and futures markets, Chen et al, [4] performed cointegration and Granger Causality tests, finding that structural break has a significant impact on long-term co-integration and causality.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric Dependence Analysis of International Crude Oil Spot and Futures Based on the Time Varying Copula-GARCH

He¹,

Zhang²

2015

TOPEJ

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Taking daily return of international crude oil spot and futures as sample, this paper analyzed the time varying and asymmetric dependence structure of them by time varying Copula-GARCH model based on sliding window and semi parameter estimation. This paper analyzed the regular changing between dependence structure of crude oil spot and futures and the return fluctuation, and confirmed that there is significant time varying asymmetric tail dependence. This paper found that the size of the sliding window had no significant influence on the conclusion, and the data of weekly return is more suitable for analysis of the trend of dependence structure of spot.

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Humps in the volatility structure of the crude oil futures market: New evidence

Cited by 30 publications

References 35 publications

Pricing of Long-Dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates

Pricing of Long-Dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates

Hedging Futures Options with Stochastic Interest Rates

Asymmetric Dependence Analysis of International Crude Oil Spot and Futures Based on the Time Varying Copula-GARCH

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