The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices

Chih Chen Hsu, An Sing Chen, Shih Kuei Lin, Ting Fu Chen

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This study analyzes affine styled-facts price dynamics of Henry Hub natural gas price by incorporating the price features of jump risk, and seasonality within stochastic volatility framework. Affine styled-facts dynamics has the advantage of being able to incorporate mean reversion (MR), stochastic volatility (SV), seasonality trends (S), and jump diffusion (J) in a standardized inclusive framework. Our main finding is that models that incorporate jumps significantly improve overall out-of-sample option pricing performance. The combined MRSVJS model provides the best fit of both daily gas price returns and the related cross section of option prices. Incorporating seasonal effects tend to provide more stable pricing ability, especially for the long-term option contracts.

Original languageEnglish
Pages (from-to)819-848
Number of pages30
JournalReview of Quantitative Finance and Accounting
Volume48
Issue number3
DOIs
StatePublished - 1 Apr 2017

Keywords

  • Affine styled-facts price dynamics
  • Jump risk
  • Mean reversion
  • Natural gas options
  • Seasonality

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