Analytically pricing crude oil options under a jump-diffusion model with stochastic liquidity risk and convenience yield
Study analyzes European crude oil options pricing under a jump-diffusion model addressing stochastic liquidity risk and convenience yield in imperfect markets.
What it examines
The paper develops a jump-diffusion pricing model for European crude oil options, incorporating stochastic liquidity risk and convenience yield. It aims to address how option prices reflect imperfect market liquidity and sudden price jumps, using advanced mathematical and stochastic methods in energy economics.
What it concludes
The study’s results highlight the impact of liquidity risk and sudden price jumps on crude oil option pricing. Applications include risk management and derivative pricing in energy markets. Future research could explore real-world data validation and model extensions to other commodities, addressing market imperfections and volatility concerns.
Evidence objects
The study introduces a novel jump-diffusion model with stochastic liquidity risk and convenience yield, revolutionizing crude oil options pricing in volatile European markets by integrating dynamic liquidity fluctuations with precision.
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Analytical rigor is evident as the team employs robust simulation-based validations using historical oil data, uncovering surprising trends where liquidity risk significantly impacts option premiums and market volatility adjustments remarkably.
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The research refines liquidity risk measurements through enhanced definitions and terminologies, bridging theory and practice while noting limitations in assumptions and urging additional empirical tests for comprehensive market insights globally.
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The paper introduces an innovative approach by integrating a jump-diffusion model with stochastic liquidity risk and convenience yield, mathematically represented as $L_t$ and $Y_t$. Its originality lies in merging jump processes with liquidity considerations, offering novel perspectives on derivative pricing in imperfect markets, ultimately providing insights into volatility modelling risk.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- This study investigates the pricing issue of European crude oil options in a market with imperfect liquidity. We adopt a jump-diffusion model incorporating stochastic …
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