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Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality

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Author Info

  • Alvaro Cartea
  • Marcelo Figueroa

Abstract

This paper presents a mean-reverting jump diffusion model for the electricity spot price and derives the corresponding forward price in closed-form. Based on historical spot data and forward data from England and Wales the model is calibrated and months, quarters, and seasons-ahead forward surfaces are presented.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860500117503
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 12 (2005)
Issue (Month): 4 ()
Pages: 313-335

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Handle: RePEc:taf:apmtfi:v:12:y:2005:i:4:p:313-335

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Web page: http://www.tandfonline.com/RAMF20

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Web: http://www.tandfonline.com/pricing/journal/RAMF20

Related research

Keywords: Energy derivatives; electricity; forward curve; forward surfaces;

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References

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  1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  2. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
  3. Ball, Clifford A & Torous, Walter N, 1985. " On Jumps in Common Stock Prices and Their Impact on Call Option Pricing," Journal of Finance, American Finance Association, vol. 40(1), pages 155-73, March.
  4. Ball, Clifford A. & Torous, Walter N., 1983. "A Simplified Jump Process for Common Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(01), pages 53-65, March.
  5. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  6. Fred Espen Benth & Lars Ekeland & Ragnar Hauge & Bj�Rn Fredrik Nielsen, 2003. "A note on arbitrage-free pricing of forward contracts in energy markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(4), pages 325-336.
  7. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
  8. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
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