Dynamic Jump Intensities and Risk Premiums in Crude Oil Futures and Options Markets

Abstract

Options on crude oil futures are the most actively traded commodity options. We develop a class of computationally efficient discrete-time jump models that allow for closed-form option valuation, and we use crude oil futures and options data to investigate the economic importance of jumps and dynamic jump intensities in these markets. Allowing for jumps is crucial for modeling crude oil futures and futures options, and we find evidence in favor of time-varying jump intensities. During crisis periods, jumps occur more frequently. The properties of the jump processes implied by the option data differ from those implied by the futures data, which may be due to improved parameter identification.

Keywords: Crude oil; Futures; Options; Discrete-time models; Jump intensities; Risk premiums

JEL Classification: G12; G13