Does the Black-Scholes formula work for electricity markets? A nonparametric approach
AbstractDespite the high volatilities recorded for electricity prices, there seems to be little demand for options on electricity. One reason for the disinterest in electricity options could arise from uncertainty about how to price these options. This study uses recent econometric advances to nonparametrically estimate correct prices for electricity options and compare these to the Black-Scholes prices. The main finding is that although the nonparametric estimates deviate significantly from the Black-Scholes prices, it would be diffcult to find an alternative parametric model that performs better. Thus, from a practical viewpoint, the Black-Scholes prices appear to be the best available.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 101.
Length: 65 pages
Date of creation: 31 Jul 2003
Date of revision:
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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
More information through EDIRC
Electricity markets; Nonparametric estimation; Option pricing;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-08-17 (All new papers)
- NEP-CFN-2003-08-17 (Corporate Finance)
- NEP-CMP-2003-08-17 (Computational Economics)
- NEP-FIN-2003-08-17 (Finance)
- NEP-RMG-2003-08-17 (Risk Management)
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