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Seasonality and Stochastic Volatility in Wheat Options

Author

Listed:
  • Michael Osei

    (Oklahoma State University)

  • Zhiguang Wang

    (South Dakota State University)

Abstract

While significant progress has been made in volatility and seasonality in modeling agricultural commodity options, little attention has been given to seasonal stochastic volatility models that incorporate the Samuelson Hypothesis. This paper examines the effects of seasonality and stochastic volatility on the pricing performance in the Chicago and Kansas City wheat options markets. We model a seasonal stochastic volatility model consistent with the Samuelson Hypothesis. The model parameters are estimated using data comprised of daily prices of wheat futures and American-style options written on these futures contracts. The seasonal stochastic volatility (SSV) and the stochastic volatility (SV) models are compared with the benchmark Black’s (1976) model to examine the effects of seasonality and stochastic volatility on the pricing performance of the wheat options. The results show that incorporating seasonality, the Samuelson’s Hypothesis, and stochastic volatility significantly improves the pricing accuracy of wheat options in the two major wheat markets.

Suggested Citation

  • Michael Osei & Zhiguang Wang, 2015. "Seasonality and Stochastic Volatility in Wheat Options," Journal of Economic Insight, Missouri Valley Economic Association, vol. 41(1), pages 1-20.
    • Handle: RePEc:mve:journl:v:41:y:2015:i:1:p:1-20
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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