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

38 Pages Posted: 1 Nov 2016

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Bingxin Li

West Virginia University

Date Written: October 27, 2016

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

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Li, Bingxin, Dynamic Jump Intensities and Risk Premiums in Crude Oil Futures and Options Markets (October 27, 2016). Journal of Derivatives, Forthcoming; Rotman School of Management Working Paper No. 2861911. Available at SSRN: https://ssrn.com/abstract=2861911

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Bingxin Li

West Virginia University ( email )

Morgantown, WV 26506
United States
304-293-7832 (Phone)

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