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.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Apr 27, 2016
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