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Correlating Lévy processes with self-decomposability: applications to energy markets

Author

Listed:
  • Matteo Gardini

    (University of Genoa)

  • Piergiacomo Sabino

    (E.ON SE)

  • Emanuela Sasso

    (University of Genoa)

Abstract

Based on the concept of self-decomposability, we extend some recent multidimensional Lévy models built using multivariate subordination. Our aim is to construct multivariate Lévy processes that can model the propagation of the systematic risk in dependent markets with some stochastic delay instead of affecting all the markets at the same time. To this end, we extend some known approaches keeping their mathematical tractability, study the properties of the new processes, derive closed-form expressions for their characteristic functions and detail how Monte Carlo schemes can be implemented. We illustrate the applicability of our approach in the context of gas, power and emission markets focusing on the calibration and on the pricing of spread options written on different underlying commodities.

Suggested Citation

  • Matteo Gardini & Piergiacomo Sabino & Emanuela Sasso, 2021. "Correlating Lévy processes with self-decomposability: applications to energy markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1253-1280, December.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:2:d:10.1007_s10203-021-00352-9
    DOI: 10.1007/s10203-021-00352-9
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    References listed on IDEAS

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    Cited by:

    1. Piergiacomo Sabino & Nicola Cufaro Petroni, 2022. "Fast simulation of tempered stable Ornstein–Uhlenbeck processes," Computational Statistics, Springer, vol. 37(5), pages 2517-2551, November.

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