Pricing swing options in the electricity markets under regime-switching uncertainty
AbstractThe spot price market for electricity is highly volatile. The time series of the daily average electricity price is characterised by seasonality, mean reversion, jumps, and regime-switching processes. In electricity markets, 'swing' contracts, which can provide some protection against the day-to-day price fluctuations, are used to incorporate flexibility in acquiring given quantities of electricity. We develop a lattice approach for the valuation of swing options by modelling the daily average price of electricity by a regime-switching process that utilises three regimes, consisting of Brownian motions and a mean-reverting process. Various numerical examples are presented to illustrate the methodology.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 10 (2010)
Issue (Month): 9 ()
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Web page: http://www.tandfonline.com/RQUF20
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- Elias, R.S. & Wahab, M.I.M. & Fang, L., 2014. "A comparison of regime-switching temperature modeling approaches for applications in weather derivatives," European Journal of Operational Research, Elsevier, vol. 232(3), pages 549-560.
- Marcus Eriksson & Jukka Lempa & Trygve Nilssen, 2014. "Swing options in commodity markets: a multidimensional Lévy diffusion model," Computational Statistics, Springer, vol. 79(1), pages 31-67, February.
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