Freight Derivatives Pricing for Decoupled Mean-Reverting Diffusion and Jumps
Kyriakou, I., Pouliasis, P. K., Papapostolou, N. C. & Andriosopoulos, K. (2017). Freight Derivatives Pricing for Decoupled Mean-Reverting Diffusion and Jumps. Transportation Research Part E: Logistics and Transportation Review, 108, pp. 80-96. doi: 10.1016/j.tre.2017.09.002
Abstract
We develop an accurate valuation setup for freight options, featuring an exponential meanreverting model for the freight rate with distinct reversion scales for its jump and diffusion components. We calibrate to Baltic option prices and analyze the freight rate dynamics. More specifically, we observe that jumps dissipate faster than the diffusive deviations about the equilibrium level. We benchmark against practitioners’ model of choice, i.e., the lognormal model and variants, and find that our approach reduces the pricing error while preserving analytical tractability and computational competence. We also find that neglecting fast mean-reverting jumps leads to nontrivial option mispricings.
| Publication Type: | Article |
|---|---|
| Additional Information: | © 2017. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ |
| Publisher Keywords: | uncertainty modelling; ocean freight; estimation; freight derivatives; pricing |
| Subjects: | H Social Sciences > HG Finance Q Science > QA Mathematics |
| Departments: | Bayes Business School > Finance School of Science & Technology > Engineering |
| SWORD Depositor: |
Available under License Creative Commons Attribution Non-commercial No Derivatives.
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