Rough volatility dynamics in commodity markets

TL;DR

This paper introduces a rough volatility model tailored for commodities, enabling automatic calibration of futures prices and effectively capturing the Samuelson effect, with empirical validation on WTI Crude Oil options.

Contribution

It develops a general rough volatility framework for commodities, focusing on rBergomi and rHeston models, and demonstrates their calibration and performance on market data.

Findings

Models successfully calibrate to futures options data

Numerical results show improved pricing accuracy

Effective treatment of the Samuelson effect in commodities

Abstract

In this paper, we develop a general rough volatility model for commodities that provides an automatic calibration of the initial term structure of the futures prices and an appropriate treatment of the Samuelson effect. After the theoretical analysis of this general model, we focus on the rBergomi and rHeston models and their calibration to market data of vanilla futures options on WTI Crude Oil. Finally, numerical results illustrate the performance of the proposed rough volatility models for commodities pricing.