Market price of risk implied by Asian-style electricity options
AbstractIn 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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Bibliographic InfoPaper provided by EconWPA in its series Econometrics with number 0502003.
Length: 19 pages
Date of creation: 07 Feb 2005
Date of revision:
Note: Type of Document - pdf; pages: 19
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Power market; Electricity price modeling; Asian option; Market price of risk; Derivatives pricing;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-ENE-2005-04-16 (Energy Economics)
- NEP-FIN-2005-04-16 (Finance)
- NEP-SEA-2005-04-16 (South East Asia)
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