Scholars release paper on arithmetic multi-factor stochastic volatility model for commodity futures and options
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Malthe Rauh Johansen, Nina Lange, and David Skovmand released a research paper on an arithmetic multi-factor stochastic volatility model for commodity futures and options. This model can generate a low-dimensional Markov representation of the futures curve, as well as semi-closed-form pricing formulas for vanilla options and basket options including calendar spread options, making it suitable for large-scale empirical estimation. The research team employed the Unscented Kalman Filter to estimate the model based on panel data of WTI crude oil futures, vanilla options, and calendar spread options from 2013 to 2024. They found that three stochastic volatility factors are needed to simultaneously capture the level and slope of the volatility term structure. If calendar spread options are not included during model estimation, the pricing of calendar spread options will be systematically overestimated due to overestimating the decorrelation between adjacent futures contracts.
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- arXiv q-finArithmetic Models for Commodity Futures, Vanilla Options, and Calendar Spread Options
The research team develops an arithmetic multi-factor stochastic volatility model applicable to commodity futures and options. This model generates a low-dimensional Markov representation of the futures curve, as well as semi-closed-form pricing formulas for vanilla options and basket options including calendar spread options, making it suitable for large-scale empirical estimation.
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