Commodity volatility, skew and inverse leverage effect

Two observations have consequences for commodity risk management and stochastic volatility modelling: the first is that the standard leverage effects in commodities are due to a misspecification and are inefficient proxies for the forward slope effect; and the second is that commodity volatility can be driven exclusively by equity volatility over certain time periods. By Krzysztof Wolyniec


It is well known that energy commodities volatility exhibits significant
variation. This is not new in the investment world, as pretty much all
financial markets show a similar, if less extreme, pattern. Heston or
SABR stochastic volatility models have been proposed in order to
properly represent this behaviour. They are used mainly to value and
risk-manage structured transactions consistent with the quoted volatility
markets. In simple terms, they can consistently fit volatility smiles and allow

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