publication . Preprint . Article . 2005

Subordinated Levy Processes and Applications to Crude Oil Options

Noureddine Krichene;
Open Access
  • Published: 01 Sep 2005
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 cont...
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Medical Subject Headings: health care economics and organizations
free text keywords: Other, [Option pricing;Characteristic functions, Esscher transform, Fourier transform, Inverse problem, Levy processes, Risk-neutral density, Volatility, crude oil, martingale, probability, oil prices, characteristic function, Computational Techniques, Energy], Derivatives market, Esscher transform, Monetary economics, Economics, Crude oil, Lévy process, Volatility (finance), Valuation of options, Futures contract, Commodity
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