An Empirical Model Comparison for Valuing Crack Spread Options

45 Pages Posted: 11 Mar 2010 Last revised: 22 Mar 2019

See all articles by Steffen Mahringer

Steffen Mahringer

University of St.Gallen - Swiss Institute of Banking and Finance

Marcel Prokopczuk

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

Date Written: June 1, 2015

Abstract

In this paper, we investigate the pricing of crack spread options. The special focus is laid on the question, of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast the bivariate GARCH volatility model for co-integrated underlyings of Duan and Pliska (2004), with the alternative of modeling the crack spread directly. Conducting an extensive empirical analysis of crude oil/heating oil and crude oil/gasoline crack spread options traded on the New York Mercantile Exchange, the more simplistic univariate approach is found to be superior with respect to option pricing performance.

Keywords: Crack Spread Options, Option Valuation, Co-integrated Underlyings

JEL Classification: G13, C50, Q40

Suggested Citation

Mahringer, Steffen and Prokopczuk, Marcel, An Empirical Model Comparison for Valuing Crack Spread Options (June 1, 2015). Energy Economics, Vol. 51, 2015, Available at SSRN: https://ssrn.com/abstract=1557006 or http://dx.doi.org/10.2139/ssrn.1557006

Steffen Mahringer

University of St.Gallen - Swiss Institute of Banking and Finance ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

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

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