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From the Samuelson volatility effect to a Samuelson correlation effect : An analysis of crude oil calendar spread options

Author

Listed:
  • Bertrand Tavin

    (EM - EMLyon Business School)

  • Lorenz Schneider

Abstract

Our first aim in this paper is to introduce a futures-based model able of capturing the main features displayed by Crude Oil futures and options contracts, such as the Samuelson volatility effect and the volatility smile. We calculate the joint characteristic function of two futures contracts in the model in analytic form and use it to price calendar spread options. In an empirical application we show that the model, in contrast to simpler nested models, can be successfully calibrated to market prices of vanilla and calendar spread options. Our second aim is to use this model to analyze the dependence structure of Crude Oil futures contracts. To this end, we propose analytical expressions giving the copula and copula density directly in terms of the joint characteristic function. These tools allow us to perform an in-depth analysis for pairs of futures, and we observe a phenomenon we call the Samuelson correlation effect.

Suggested Citation

  • Bertrand Tavin & Lorenz Schneider, 2018. "From the Samuelson volatility effect to a Samuelson correlation effect : An analysis of crude oil calendar spread options," Post-Print hal-02311970, HAL.
    • Handle: RePEc:hal:journl:hal-02311970
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    References listed on IDEAS

    as
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    3. Annika Kemper & Maren D. Schmeck & Anna Kh. Balci, 2020. "The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets," Papers 2002.07561, arXiv.org, revised Jun 2022.
    4. Kemper, Annika & Schmeck, Maren Diane & Kh.Balci, Anna, 2022. "The market price of risk for delivery periods: Pricing swaps and options in electricity markets," Energy Economics, Elsevier, vol. 113(C).
    5. Thomas Deschatre & Xavier Warin, 2023. "A Common Shock Model for multidimensional electricity intraday price modelling with application to battery valuation," Papers 2307.16619, arXiv.org.
    6. Kang, Boda & Nikitopoulos, Christina Sklibosios & Prokopczuk, Marcel, 2020. "Economic determinants of oil futures volatility: A term structure perspective," Energy Economics, Elsevier, vol. 88(C).
    7. Brooks, Robert & Brooks, Joshua A., 2022. "Samuelson hypothesis and carry arbitrage: U.S. and China," Journal of International Money and Finance, Elsevier, vol. 128(C).
    8. Sania Wadud & Robert D. Durand & Marc Gronwald, 2021. "Connectedness between the Crude Oil Futures and Equity Markets during the Pre- and Post-Financialisation Eras," CESifo Working Paper Series 9202, CESifo.
    9. Kemper, Annika & Schmeck, Maren Diane & Khripunova Balci, Anna, 2020. "The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets," Center for Mathematical Economics Working Papers 635, Center for Mathematical Economics, Bielefeld University.

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