From the Samuelson Volatility Effect to a Samuelson Correlation Effect: An Analysis of Crude Oil Calendar Spread Options

Journal of Banking & Finance, Volume 95, October 2018, Pages 185-202

39 Pages Posted: 27 Sep 2014 Last revised: 23 Feb 2019

See all articles by Lorenz Schneider

Lorenz Schneider

EMLYON Business School

Bertrand Tavin

emlyon business school

Date Written: November 4, 2016

Abstract

Our first aim in this paper is to introduce a futures-based model able of capturing the main features displayed by Crude Oil futures and options contracts, such as the Samuelson volatility effect and the volatility smile. We calculate the joint characteristic function of two futures contracts in the model in analytic form and use it to price calendar spread options. In an empirical application we show that the model, in contrast to simpler nested models, can be successfully calibrated to market prices of vanilla and calendar spread options. Our second aim is to use this model to analyze the dependence structure of Crude Oil futures contracts. To this end, we propose analytical expressions giving the copula and copula density directly in terms of the joint characteristic function. These tools allow us to perform an in-depth analysis for pairs of futures, and we observe a phenomenon we call the Samuelson correlation effect.

Keywords: Multi-factor stochastic volatility, Futures curve modelling, Option pricing, Calendar spread options, Crude oil, Fourier inversion methods

JEL Classification: C02, G13

Suggested Citation

Schneider, Lorenz and Tavin, Bertrand, From the Samuelson Volatility Effect to a Samuelson Correlation Effect: An Analysis of Crude Oil Calendar Spread Options (November 4, 2016). Journal of Banking & Finance, Volume 95, October 2018, Pages 185-202, Available at SSRN: https://ssrn.com/abstract=2501931 or http://dx.doi.org/10.2139/ssrn.2501931

Lorenz Schneider

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Bertrand Tavin (Contact Author)

emlyon business school ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
277
Abstract Views
1,577
rank
131,258
PlumX Metrics