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4075. Calendar Spread Options and the Term Structure of Volatility
Invited abstract in session MA-57: Modelling commodity markets dynamics, stream Modern Decision Making in Finance and Insurance.
Monday, 8:30-10:00Room: S06 (building: 101)
Authors (first author is the speaker)
| 1. | Malthe Rauh Johansen
|
| Department of Mathematical Sciences, University of Copenhagen | |
| 2. | Nina Lange
|
| Department of Mathematical Sciences, University of Copenhagen |
Abstract
We introduce a multi-factor stochastic volatility model aimed at describing the combined dynamics of both futures and option prices in commodity markets. The model is arithmetic, meaning that futures prices are affine functions of a finite set of state variables, which allows us to derive tractable formulas for vanilla options, and importantly, also for spread options. This dual tractability is a distinguishing feature of arithmetic models when compared to their multiplicate counterparts, and makes the model parameters amenable to efficient estimation using the Kalman filtering methodology on time series data consisting of futures and both types of options.
As an empirical application of the model, we apply the unscented Kalman filter on a data panel consisting of WTI crude oil futures, vanilla options, and calendar spread options. We demonstrate that the model can achieve a good fit to the data and describe how the inclusion of calendar spread options in the estimation provides additional information on the term structure of volatility and correlation.
Keywords
- Financial Modelling
Status: accepted
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