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An empirical model comparison for valuing crack spread options

Mahringer, S. and Prokopczuk, M. (2015) An empirical model comparison for valuing crack spread options. Energy Economics, 51. pp. 177-187. ISSN 0140-9883

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To link to this item DOI: 10.1016/j.eneco.2015.06.015

Abstract/Summary

In this paper, we investigate the pricing of crack spread options. Particular emphasis is placed on the question of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast a bivariate GARCH volatility model for cointegrated underlyings with the alternative of modeling the crack spread directly. Conducting an empirical analysis of crude oil/heating oil and crude oil/gasoline crack spread options traded on the New York Mercantile Exchange, the more simplistic univariate approach is found to be superior with respect to option pricing performance.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:51260
Publisher:Elsevier

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