Humps in the volatility structure of the crude oil futures market: New evidence

C. Chiarella, B. Kang, C.S. Nikitopoulos, T.-D. Tô

Research output: Contribution to journalArticlepeer-review


This paper analyses the volatility structure of commodity derivatives markets. The model encompasses hump-shaped, unspanned stochastic volatility, which entails a finite-dimensional affine model for the commodity futures curve and quasi-analytical prices for options on commodity futures. Using an extensive database of crude oil futures and futures options spanning 21 years, we find the presence of hump-shaped, partially spanned stochastic volatility in the crude oil market. The hump shaped feature is more pronounced when the market is more volatile, and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes.
Original languageEnglish
Pages (from-to)n/a
JournalEnergy economics
Early online date10 Jun 2013
Publication statusPublished - 2013

Cite this