Volatility and Price Jumps in Agricultural Futures Prices-Evidence from Wheat Options
Evidence suggests that agricultural futures price movements have fat-tailed distributions and exhibit sudden and unexpected price jumps. There is also evidence that the volatility of futures prices is time-dependent both as a function of calendar-time (seasonal effect) and time to maturity (maturity effect). This article extends <link rid="b4">Bates' (1991)</link> jump-diffusion option pricing model by including both seasonal and maturity effects in the volatility specification. Both in-sample and out-of-sample procedures to fit market option prices on wheat futures show that the suggested model outperforms previous published models. A numerical example shows the magnitude of pricing errors for option valuation. Copyright 2004 American Agricultural Economics Association.
Year of publication: |
2004
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Authors: | Koekebakker, Steen ; Lien, Gudbrand |
Published in: |
American Journal of Agricultural Economics. - American Agricultural Economics Association. - Vol. 86.2004, 4, p. 1018-1031
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Publisher: |
American Agricultural Economics Association |
Saved in:
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