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

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  • Alvaro Cartea

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Marcelo Gustavo Figueroa

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

In this paper we present a mean-reverting jump diffusion model for the electricity spot price. We obtain a closed-form solution for forward contracts and calibrate it to market data from England and Wales. Finally, based on the calibrated forward curve we present months, quarters, and seasons-ahead forward surfaces.

Suggested Citation

  • Alvaro Cartea & Marcelo Gustavo Figueroa, 2005. "Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality," Birkbeck Working Papers in Economics and Finance 0507, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0507
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    File URL: https://eprints.bbk.ac.uk/id/eprint/27034
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    References listed on IDEAS

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    1. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
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    3. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
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    6. Etheridge,Alison, 2002. "A Course in Financial Calculus," Cambridge Books, Cambridge University Press, number 9780521890779.
    7. 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.
    8. Fred Espen Benth & Lars Ekeland & Ragnar Hauge & BjøRn 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.
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    10. Etheridge,Alison, 2002. "A Course in Financial Calculus," Cambridge Books, Cambridge University Press, number 9780521813853.
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