Application of Option Pricing Framework for Analyzing and Predicting Stock Prices in Energy Markets (Research Paper Sample)

Application of Option Pricing Framework for Analyzing and Predicting Stock Prices in Energy Markets
Victor Alexander Okhuese​1,*, Jane Akinyi Aduda​2 and Joseph Mung’atu​3
​1Department of Mathematics, Pan African University Institute for Basic Science Technology and Innovation, Nairobi, Kenya​2,3College of Pure and Applied Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Article Info
Volume 7 Issue 4
Page Number: 39-57
Publication Issue :
July-August-2020
Article History
Accepted : 01 July 2020
Published : 07 July 2020

ABSTRACT
In this study, the evaluation of the pricing framework for predicting West Texas Intermediate crude oil stock was implemented where detailed analysis with varying changepoint shows that an arbitrage-free forward price can be derived from the buy-and hold strategy in the energy market thereby enabling investors in the market willing to be salvage from the market uncertainties as well as Arrow-Debreu situations to execute a spot or forward contracts depending on the time and place the market becomes favorable.
Keywords : Energy, contract, volatility, lévy process, jumps.
2010 AMS Subject Classification : 91G10, 91G20, 91G80.

* INTRODUCTION
The development and evaluation of pricing framework for an energy market has motivated several approaches for optimal estimation of results as [1] who extended the more direct ap- proach from one-factor model into a two-factor model for general commodity futures while capturing roughly term-structures (forward curves) features. Meanwhile the other line of re- search is to model futures markets directly, without considering spot prices uising Heath-Jarrow- Morton-type of model (HJM) which is given in the context of power in [2] while considering the problem of modeling the pricing dynamics of forward and futures contracts in the relation of spot, forward and swap-price dynamics.