Affine-Structure Models and the Pricing of Energy Commodity Derivatives

Kyriakou, I., Nomikos, N., Pouliasis, P. K. & 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

[img]
Preview
Text - Accepted Version
Download (1MB) | Preview

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.

Item 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.
Uncontrolled Keywords: energy prices, affine models, futures, arithmetic Asian options, control variate Monte Carlo
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/12848

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics