Journal article

Authors list: Alfeus, Mesias; Nikitopoulos, Christina S.; Overbeck, Ludger

Publication year: 2024

Pages: 347-363

Journal: Quantitative Finance

Volume number: 24

Issue number: 3-4

ISSN: 1469-7688

eISSN: 1469-7696

DOI Link: https://doi.org/10.1080/14697688.2023.2291081

Publisher: Taylor and Francis Group

Abstract: 
This paper analyses the attributes and the significance of the roughness of oil market volatility. We employ unspanned stochastic volatility models driven by rough Brownian motions that yield semi-analytical prices for future options entailing efficient calibration applications. By performing a Monte Carlo simulation study, we show that the semi-analytical pricing performs well thus establishing its efficiency for calibration applications. Thus we calibrate option prices written on oil futures and provide empirical evidence of the roughness in oil volatility. Introducing just one additional parameter, the Hurst parameter, indicating the roughness of the volatility improves the calibration by almost a factor of 10. The calibrated option-implied Hurst parameter varies over time, but the entire set of parameters becomes more stable than in the non-rough case corresponding to a fixed Hurst parameter 1/2. These results underscore the importance to model the time dependency of the roughness of oil market volatility.

Harvard Citation style: Alfeus, M., Nikitopoulos, C. and Overbeck, L. (2024) Implied roughness in the term structure of oil market volatility, Quantitative Finance, 24(3-4), pp. 347-363. https://doi.org/10.1080/14697688.2023.2291081

APA Citation style: Alfeus, M., Nikitopoulos, C., & Overbeck, L. (2024). Implied roughness in the term structure of oil market volatility. Quantitative Finance. 24(3-4), 347-363. https://doi.org/10.1080/14697688.2023.2291081