Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives

Posted: 8 Dec 2009 Last revised: 11 Feb 2016

See all articles by Anders B. Trolle

Anders B. Trolle

Copenhagen Business School

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area; Simon Fraser University (SFU); National Bureau of Economic Research (NBER)

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Date Written: November 1, 2009

Abstract

Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasi-analytical prices of options on futures contracts, and dynamics of the futures curve in terms of a low-dimensional affine state vector. We estimate the model on NYMEX crude oil derivatives using an extensive panel data set of 45,517 futures prices and 233,104 option prices, spanning 4082 business days. We find strong evidence for two predominantly unspanned volatility factors.

JEL Classification: G13

Suggested Citation

Trolle, Anders B. and Schwartz, Eduardo S. and Schwartz, Eduardo S., Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives (November 1, 2009). Review of Financial Studies, vol. 22, no. 11, p. 4423-4461, 2009, Available at SSRN: https://ssrn.com/abstract=1519275 or http://dx.doi.org/hhp036

Anders B. Trolle (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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