Seasonal Stochastic Volatility: Implications for the Pricing of Commodity Options

53 Pages Posted: 5 Jul 2011 Last revised: 22 Mar 2019

See all articles by Juan Arismendi-Zambrano

Juan Arismendi-Zambrano

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting; University of Reading - ICMA Centre

Janis Back

WHU - Otto Beisheim School of Management

Marcel Prokopczuk

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

Raphael Paschke

University of Mannheim - Department of Business Administration and Finance

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: February 1, 2016

Abstract

Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed form option valuation formulas are derived. We then empirically study the impact of the proposed seasonal stochastic volatility model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.

Keywords: commodities, seasonality, stochastic volatility, options pricing, natural gas, corn

JEL Classification: G13

Suggested Citation

Arismendi-Zambrano, Juan and Back, Janis and Prokopczuk, Marcel and Paschke, Raphael and Rudolf, Markus, Seasonal Stochastic Volatility: Implications for the Pricing of Commodity Options (February 1, 2016). Journal of Banking and Finance, Vol. 66, 2016, Available at SSRN: https://ssrn.com/abstract=1879109 or http://dx.doi.org/10.2139/ssrn.1879109

Juan Arismendi-Zambrano

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting ( email )

County Kildare
Ireland
+353 17087267 (Phone)

HOME PAGE: http://https://www.maynoothuniversity.ie/economics-finance-and-accounting/

University of Reading - ICMA Centre ( email )

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

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

Raphael Paschke

University of Mannheim - Department of Business Administration and Finance ( email )

D-68131 Mannheim
Germany

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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