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Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives / Anders B. Trolle, Eduardo S. Schwartz.
- Format:
- Book
- Author/Creator:
- Trolle, Anders B.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w12744.
- NBER working paper series no. w12744
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2006.
- Summary:
- We conduct a comprehensive analysis of unspanned stochastic volatility in commodity markets in general and the crude-oil market in particular. We present model-free results that strongly suggest the presence of unspanned stochastic volatility in the crude-oil market. We then develop a tractable model for pricing commodity derivatives in the presence of unspanned stochastic volatility. The model features correlations between innovations to futures prices and volatility, quasi-analytical prices of options on futures and futures curve dynamics in terms of a low-dimensional affine state vector. The model performs well when estimated on an extensive panel data set of crude-oil futures and options.
- Notes:
- Print version record
- December 2006.
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