Seasonality and the Valuation of Commodity Options

61 Pages Posted: 29 Nov 2009 Last revised: 2 Jan 2013

See all articles by Janis Back

Janis Back

WHU - Otto Beisheim School of Management

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: September 21, 2012

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.

Keywords: Commodities, Seasonality, Options Pricing

JEL Classification: G13

Suggested Citation

Back, Janis and Prokopczuk, Marcel and Rudolf, Markus, Seasonality and the Valuation of Commodity Options (September 21, 2012). Journal of Banking and Finance, Vol. 37, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=1514803 or http://dx.doi.org/10.2139/ssrn.1514803

Janis Back

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar
Germany

Marcel Prokopczuk (Contact Author)

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-(0)261-6509-420 (Phone)

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