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Time-Varying Deterministic Volatility Model for Options on Wheat Futures

Author

Listed:
  • Marco Haase

    (Department of Finance, Faculty of Business and Economics, University of Basel, Peter Merian Weg 6, CH-4002 Basel, Switzerland)

  • Jacqueline Henn

    (Department of Finance, Faculty of Business and Economics, University of Basel, Peter Merian Weg 6, CH-4002 Basel, Switzerland)

Abstract

This study introduces a robust model that captures wheat futures’ volatility dynamics, influenced by seasonality, time to maturity, and storage dynamics, with minimal calibratable parameters. Our approach reduces error-proneness and enhances plausibility checks, offering a reliable alternative to models that are difficult to calibrate. Transferring estimated parameters from liquid to illiquid markets is feasible, which is challenging for models with numerous parameters. This is of practical importance as it improves the modeling of volatility in illiquid markets, where price discovery is less efficient. In liquid markets, on the other hand, where speculative activity is high, we find that implied volatility is usually the best measure. Additionally, the introduced volatility model is suitable for pricing options on wheat futures as a risk-neutral measure.

Suggested Citation

  • Marco Haase & Jacqueline Henn, 2024. "Time-Varying Deterministic Volatility Model for Options on Wheat Futures," Commodities, MDPI, vol. 3(3), pages 1-21, August.
    • Handle: RePEc:gam:jcommo:v:3:y:2024:i:3:p:19-354:d:1462854
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