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Department of Applied Finance and Actuarial Studies

Dr Jing Zhao Seminar

Research Seminars - business and economics
  • Topic: Cointegration and stochastic correlations: Application to the pricing of commodity derivatives
  • Speaker: Dr Jing Zhao, Lecturer in Finance, School of Economics and Finance, La Trobe University
  • Venue:E4A 623
  • When: 9th November, 2011, (Wed)
  • Time: 4-5pm

This is a joint seminar with the Macquarie University Centre for Financial Risk.

Cointegration and stochastic correlations, including stochastic volatilities, are statistically significant for the spot prices of crude oil and gasoline. As these commodities are not traded on exchange, their futures prices provide us with strong empirical support that cointegration contributes significantly to the stochastic movements of their convenience yields in addition to their storage costs. We develop continuous-time dynamics of cointegrated assets with a stochastic covariance matrix to capture the effects of cointegration and stochastic correlations. Our proposed model allows us to super-calibrate the cointegration parameters by fitting to the observed term structure of futures prices. We demonstrate the modelā€™s use in valuing options on a single commodity and on multiple commodities using Fourier transform techniques.



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