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A Self-Consistent Model for the Forward Price Dynamics

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  • Vlad Makhankov

    (BusinessMath)

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    Abstract

    We consider mean-reverting stochastic processes and build a self- consistent model for forward price dynamics and their applications in power industries. This model with stochastic volatility of the forward price is built using the ideas and equations of stochastic differential geometry in order to close the system of equations for the forward price and its volatility. Stationary distributions for the forward price volatility are found analytically as well as the forward price curves in the one factor case. We consider two models for regular forward price volatility. 1)Pure exponential two parameter model with zero asymptotic. 2)Three parameter exponential model with non-zero asymptotic. The first model is a toy one although it can be used in the case of long terms, the second one is quite reliable for short terms. Those models will also play a role of initial conditions for a stochastic process described forward price volatility. We compare our results with those known from the literature.

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    Bibliographic Info

    Paper provided by EconWPA in its series Econometrics with number 0308005.

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    Length: 25 pages
    Date of creation: 26 Aug 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpem:0308005

    Note: Type of Document - Word; prepared on Word file; to print on HP LaserJet; pages: 25 ; figures: included 6 figures. Word for Windows document submitted via ftp
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    Web page: http://128.118.178.162

    Related research

    Keywords: Forward price; volatility; stochastic; mean-reverting process;

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