Peer-reviewed
An empirical model comparison for valuing crack spread options
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.
• We investigate the pricing of crack spread options. • We compare univariate and bivariate modelling approaches. • We conduct a broad empirical analysis for NYMEX contracts. • The univariate approach is found to be preferable
• We investigate the pricing of crack spread options. • We compare univariate and bivariate modelling approaches. • We conduct a broad empirical analysis for NYMEX contracts. • The univariate approach is found to be preferable
Article, 2015