Subordinated Levy Processes and Applications to Crude Oil Options

Subordinated Levy Processes and Applications to Crude Oil Options

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One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures'' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures'' level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.I. INTRODUCTION A suggested approach to oil markets analysis is to treat oil as an asset, besides its role as a ... have inconsistencies with market data, typically in relation to the implied volatility and to the dynamics of the asseta#39;s price.


Title:Subordinated Levy Processes and Applications to Crude Oil Options
Author: Mr. Noureddine Krichene
Publisher:International Monetary Fund - 2005-09-01
ISBN-13:

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