Valuation of Nigerian Crude Oil using Heston’s Stochastic-Jump Model

A. C. Onyegbuchulem; B. O. Onyegbuchulem; P. C. Achugamuonu

A. C. Onyegbuchulem Department of Mathematics, Alvan Ikoku Federal College of Education, Owerri, Imo State
B. O. Onyegbuchulem Department of Statistics, Imo State Polytechnic, Umuagwo, Imo State.
P. C. Achugamuonu Department of Mathematics, Alvan Ikoku Federal College of Education, Owerri, Imo State

Abstract

Presence of new information in many commodity markets leads to unpredictably changes and jumps in commodity prices. This article investigates the possible existence of jumps in the crude oil prices in Nigeria, an improved version of the Heston’s model was developed to take care of these changes and jumps. We present the model and demonstrate its implementation using crude oil price data from 2010 to 2020. Characteristic function approach was adopted to value oil prices. The Non-linear least squares method of calibration was used for the calibration of the model parameters. Simulation studies show that Heston Stochastic-Jump model is suitable for pricing crude oil in Nigeria. The Matlab software was used for both calculations and simulations