TY - JOUR
T1 - An analysis of implied volatility jump dynamics
T2 - Novel functional data representation in crude oil markets
AU - Kearney, Fearghal
AU - Murphy, Finbarr
AU - Cummins, Mark
N1 - Publisher Copyright:
© 2015 Elsevier Inc.
PY - 2015/7/1
Y1 - 2015/7/1
N2 - The predominant fear in capital markets is that of a price spike. Commodity markets differ in that there is a fear of both upward and down jumps, this results in implied volatility curves displaying distinct shapes when compared to equity markets. The use of a novel functional data analysis (FDA) approach, provides a framework to produce and interpret functional objects that characterise the underlying dynamics of oil future options. We use the FDA framework to examine implied volatility, jump risk, and pricing dynamics within crude oil markets. Examining a WTI crude oil sample for the 2007-2013 period, which includes the global financial crisis and the Arab Spring, strong evidence is found of converse jump dynamics during periods of demand and supply side weakness. This is used as a basis for an FDA-derived Merton (1976) jump diffusion optimised delta hedging strategy, which exhibits superior portfolio management results over traditional methods.
AB - The predominant fear in capital markets is that of a price spike. Commodity markets differ in that there is a fear of both upward and down jumps, this results in implied volatility curves displaying distinct shapes when compared to equity markets. The use of a novel functional data analysis (FDA) approach, provides a framework to produce and interpret functional objects that characterise the underlying dynamics of oil future options. We use the FDA framework to examine implied volatility, jump risk, and pricing dynamics within crude oil markets. Examining a WTI crude oil sample for the 2007-2013 period, which includes the global financial crisis and the Arab Spring, strong evidence is found of converse jump dynamics during periods of demand and supply side weakness. This is used as a basis for an FDA-derived Merton (1976) jump diffusion optimised delta hedging strategy, which exhibits superior portfolio management results over traditional methods.
KW - Commodity options
KW - Functional data analysis
KW - Implied volatility
KW - Jump diffusion models
UR - http://www.scopus.com/inward/record.url?scp=84928982611&partnerID=8YFLogxK
U2 - 10.1016/j.najef.2015.04.006
DO - 10.1016/j.najef.2015.04.006
M3 - Article
AN - SCOPUS:84928982611
SN - 1062-9408
VL - 33
SP - 199
EP - 216
JO - North American Journal of Economics and Finance
JF - North American Journal of Economics and Finance
ER -