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Market price of risk implied by Asian-style electricity options

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  • Rafal Weron

    (Hugo Steinhaus Center)

Abstract

In this paper we propose a jump diffusion type model which recovers the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior. Calibration of the market price of risk allows for pricing of Asian-type options written on the spot electricity price traded at Nord Pool. The usefulness of the approach is confirmed by out-of-sample tests.

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File URL: http://128.118.178.162/eps/em/papers/0502/0502003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0502003.

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Length: 19 pages
Date of creation: 07 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwpem:0502003

Note: Type of Document - pdf; pages: 19
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Web page: http://128.118.178.162

Related research

Keywords: Power market; Electricity price modeling; Asian option; Market price of risk; Derivatives pricing;

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References

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  1. Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September.
  2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  3. Max Stevenson, 2001. "Filtering and Forecasting Spot Electricity Prices in the Increasingly Deregulated Australian Electricity Market," Research Paper Series 63, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
  6. Pavel Cizek & Wolfgang Karl Härdle & Rafal Weron, 2005. "Statistical Tools for Finance and Insurance," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0501.
  7. 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.
  8. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
  9. Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics 0502005, EconWPA.
  10. Simonsen, Ingve, 2003. "Measuring anti-correlations in the nordic electricity spot market by wavelets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 322(C), pages 597-606.
  11. Ingve Simonsen, 2001. "Measuring Anti-Correlations in the Nordic Electricity Spot Market by Wavelets," Papers cond-mat/0108033, arXiv.org, revised Apr 2003.
  12. Iivo Vehvilainen, 2002. "Basics of electricity derivative pricing in competitive markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 45-60.
  13. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401.
  14. Geman, Hélyette & Roncoroni, Andrea, 2003. "A Class of Marked Point Processes for Modelling Electricity Prices," ESSEC Working Papers DR 03004, ESSEC Research Center, ESSEC Business School.
  15. Rafal Weron, 2001. "Measuring long-range dependence in electricity prices," Papers cond-mat/0103621, arXiv.org.
  16. Rafal Weron & Ingve Simonsen & Piotr Wilman, 2003. "Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market," Econometrics 0303007, EconWPA.
  17. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  18. Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
  19. Weron, R. & Kozłowska, B. & Nowicka-Zagrajek, J., 2001. "Modeling electricity loads in California: a continuous-time approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 344-350.
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Cited by:
  1. Sandro Sapio, 2008. "Volatility-price relationships in power exchanges: A demand-supply analysis," LEM Papers Series 2008/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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