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UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts

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Author Info
Alvaro Cartea (Department of Economics, Mathematics & Statistics, Birkbeck)
Thomas Williams

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Abstract

We employ the Schwartz and Smith (2000) model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0608.pdf
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File Function: First version, 2006
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Publisher Info
Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0608.

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Date of creation: Sep 2006
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Handle: RePEc:bbk:bbkefp:0608

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Related research
Keywords: Interruptible supply contracts; gas markets; commodities; market price of short-term and long-term risk; multi-exercise Bermudan options; convenience yield.;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Álvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor and Francis Journals, vol. 12(4), pages 313-335, December. [Downloadable!] (restricted)
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  2. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(1), pages 113-47.
  3. 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 and Francis Journals, vol. 10(4), pages 325-336, December. [Downloadable!] (restricted)
  4. Marcelo G. Figueroa, 2006. "Pricing Multiple Interruptible-Swing Contracts," Birkbeck Working Papers in Economics and Finance 0606, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  5. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July. [Downloadable!] (restricted)
  6. Álvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reik H. Boerger & Alvaro Cartea & Ruediger Kiesel & Gero Schindlmayr, 2007. "A Multivariate Commodity Analysis and Applications to Risk Management," Birkbeck Working Papers in Economics and Finance 0709, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  2. Fred Espen Benth & Alvaro Cartea & Ruediger Kiesel, 2006. "Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium," Birkbeck Working Papers in Economics and Finance 0611, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
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