Affine-Structure Models and the Pricing of Energy Commodity Derivatives

Abstract

We consider a seasonal mean-reverting model for energy commodity prices with jumps and Heston-type stochastic volatility, as well as three nested models for comparison. By exploiting the affine form of the log-spot models, we develop a general valuation framework for futures and discrete arithmetic Asian options. We investigate five major petroleum commodities from the European market (Brent crude oil, gasoil) and US market (light sweet crude oil, gasoline, heating oil) and analyze the effects of the competing fitted stochastic spot models in futures pricing, Asian options pricing and hedging. We find evidence that price jumps and stochastic volatility are important features of the petroleum price dynamics.

Keywords: Energy prices, affine models, futures, arithmetic Asian options, control variate Monte Carlo

JEL Classification: G15, G13, C63, C13