Subordinated Levy Processes and Applications to Crude Oil Options
International Monetary Fund (IMF) - African Department
IMF Working Paper No. 05/174
One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures` options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations,implying a higher probability mass on crude oil prices remaining above the futures` level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.
Number of Pages in PDF File: 26
Keywords: Characteristic functions, Esscher transform, Fourier transform, Inverse problem, Levy processes, Option pricing, Risk-neutral density, Volatility
JEL Classification: C63, G13, Q49working papers series
Date posted: March 3, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.328 seconds