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A two-factor model for the electricity forward market

Author

Listed:
  • Rudiger Kiesel
  • Gero Schindlmayr
  • Reik Borger

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.

Suggested Citation

  • Rudiger Kiesel & Gero Schindlmayr & Reik Borger, 2009. "A two-factor model for the electricity forward market," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 279-287.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:3:p:279-287
    DOI: 10.1080/14697680802126530
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    References listed on IDEAS

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    1. Damiano Brigo & Jan Liinev, 2005. "On the distributional distance between the lognormal LIBOR and swap market models," Quantitative Finance, Taylor & Francis Journals, vol. 5(5), pages 433-442.
    2. Les Clewlow & Chris Strickland, 1999. "Valuing Energy Options in a One Factor Model Fitted to Forward Prices," Research Paper Series 10, Quantitative Finance Research Centre, University of Technology, Sydney.
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    8. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
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