Journal of Energy Markets

Risk.net

Implied volatility surface reconstruction for energy markets: spot price modeling versus surface parametrization

Mikhail V. Deryabin

ABSTRACT

We describe and compare two methodologies for calculating the implied volatility of commodity prices (given the market prices of options on futures or implied volatilities, and a forward curve). The first methodology involves fitting an exponential mean-reverting jump-diffusion model to the data, while the second uses a particular parametrization of the surface that ensures no-arbitrage conditions. We use NYMEX data on West Texas Intermediate European-type oil options on futures as an example.

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