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Type Book Chapter
Scope Discipline-based scholarship
Title The Impact of Cointegration on Commodity Spread Options
Organization Unit
Authors
  • Erich Walter Farkas
  • Elise Gourier
  • Robert Huitema
  • Ciprian Necula
Editors
  • Kathrin Glau
  • Zorana Grbac
  • Matthias Scherer
  • Rudi Zagst
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Booktitle Innovations in Derivatives Markets
ISBN 978-3-319-33445-5
ISSN 2194-1009
Number 165
Place of Publication Cham
Publisher Springer
Page Range 421 - 435
Date 2016
Abstract Text In this work we explore the implications of cointegration in a system of commodity prices on the premiums of options written on various spreads on the futures prices of these commodities. We employ a parsimonious, yet comprehensive model for cointegration in a system of commodity prices. The model has an exponential affine structure and is flexible enough to allow for an arbitrary number of cointegration relationships. We conduct an extensive simulation study on pricing spread options. We argue that cointegration creates an upward sloping term structure of correlation, that in turn lowers the volatility of spreads and consequently the price of options on them.
Free access at DOI
Digital Object Identifier 10.1007/978-3-319-33446-2_20
Other Identification Number merlin-id:14481
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