Valuation of commodity derivatives under jump-diffusion processes

Abstract

The estimation of the market prices of risk is an open question in the jumpdi usion derivative literature when a closed-form solution for the future pricing problem is not known. In this paper, we obtain some results that relate the drifts and jump intensities of the risk-neutral processes with future and spot prices. These results provide an original procedure to estimate the riskneutral drifts and jump intensities. These functions are not observable but their estimation is necessary for pricing commodity derivatives. Moreover, this new approach avoids the estimation of the physical drift as well as the market prices of risk in order to price commodity futures. Finally, an application to NYMEX (New York Mercantile Exchange) data is illustrated.