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A two-factor model for the electricity forward market

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  • Rudiger Kiesel
  • Gero Schindlmayr
  • Reik Borger
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    Abstract

    This paper provides a two-factor model for electricity futures that captures the main features of the market and fits the term structure of volatility. The approach extends the one-factor model of Clewlow and Strickland to a two-factor model and modifies it to make it applicable to the electricity market. We will particularly deal with the existence of delivery periods in the underlying futures. Additionally, the model is calibrated to options on electricity futures and its performance for practical application is discussed.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680802126530
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    Bibliographic Info

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

    Volume (Year): 9 (2009)
    Issue (Month): 3 ()
    Pages: 279-287

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    Handle: RePEc:taf:quantf:v:9:y:2009:i:3:p:279-287

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    Web page: http://www.tandfonline.com/RQUF20

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    Related research

    Keywords: Quantitative finance; Weather derivative pricing; Applied mathematical finance; Time series analysis;

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    Cited by:
    1. Joanna Janczura & Rafal Weron, 2012. "Inference for Markov-regime switching models of electricity spot prices," HSC Research Reports HSC/12/01, Hugo Steinhaus Center, Wroclaw University of Technology.
    2. Hepperger, Peter, 2012. "Hedging electricity swaptions using partial integro-differential equations," Stochastic Processes and their Applications, Elsevier, vol. 122(2), pages 600-622.
    3. Cartea, Álvaro & González-Pedraz, Carlos, 2012. "How much should we pay for interconnecting electricity markets? A real options approach," Energy Economics, Elsevier, vol. 34(1), pages 14-30.

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