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Affine-Structure Models and the Pricing of Energy Commodity Derivatives

Kyriakou, I., Nomikos, N., Pouliasis, P. K. and Papapostolou, N. C. (2016). Affine-Structure Models and the Pricing of Energy Commodity Derivatives. European Financial Management, 22(5), pp. 853-881. doi: 10.1111/eufm.12071

Abstract

We consider a seasonal mean-reverting model for energy commodity prices with jumps and Heston-type stochastic volatility, and 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 Europe (Brent crude oil, gasoil) and US (light sweet crude oil, gasoline, heating oil) and analyse the effects of the competing fitted 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.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Kyriakou, I., Nomikos, N., Pouliasis, P. K. & Papapostolou, N. C. Affine-Structure Models and the Pricing of Energy Commodity Derivatives. European Financial Management, which is to be published in final form at http://dx.doi.org/10.1111/eufm.12071. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Publisher Keywords: energy prices, affine models, futures, arithmetic Asian options, control variate Monte Carlo
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/12848
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