Jumps in energy commodity markets

Neil A. Wilmot, Charles F. Mason

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This chapter is concernedwith the statistical behavior of energy commodity prices. Aparticularly salient feature ofmany commoditymarkets is the unexpectedly rapid changes - or jumps - that result from the arrival of new information. Such a processwould contradict the viewthat energy commodity prices followa geometric Brownian motion (GBM) process (i.e. log returns are normally distributed). That is, assuming a GBMprocess for the data-generatingmechanismwould be insufficient to capture the true dynamics of energy commodity markets. The discontinuous arrival of information necessitates a stochastic process that incorporates this feature, and as such, Jump processes have become an important tool in the analysis of energy markets. While such models allow for multiple jumps in a period, the jump intensity is assumed to be constant over time - a questionable assumption given the dynamics of such energy markets. The autoregressive conditional jump intensity (ARJI) model ofChan and Maheu [2002], which allows for a time-varying jump intensity, is applied to important energy commodity markets. The results indicate the importance of incorporating time-varying jump intensities in energy markets.

Original languageEnglish (US)
Title of host publicationHandbook of Energy Finance
Subtitle of host publicationTheories, Practices and Simulations
PublisherWorld Scientific Publishing Co.
Pages215-229
Number of pages15
ISBN (Electronic)9789813278387
ISBN (Print)9789813278370
DOIs
StatePublished - Jan 1 2020

Keywords

  • ARJI
  • Energy commodity prices
  • GARCH
  • Jump diffusion

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