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A Heath–Jarrow–Morton framework for energy markets: review and applications for practitioners

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  • Matteo Gardini

    (Eni Plenitude
    University of Genoa)

  • Edoardo Santilli

    (Eni Plenitude)

Abstract

This article delves into the application of the Heath–Jarrow–Morton framework to energy markets. Its objective is to provide a comprehensive overview of this subject, emphasizing practical considerations over theoretical aspects, which have already been extensively explored in the literature. The aim of this work is to serve as a practical guide for industry professionals and anyone involved in navigating the practical challenges inherent in applying this approach to energy markets. In particular, the article focuses on several key areas, including market structure analysis, model calibration using Principal Component Analysis, Monte Carlo simulations, and the pricing of derivatives. European power and gas markets are examined as primary applications. The model is calibrated using historical futures data, followed by simulations of futures and spot prices, with subsequent analysis of the outcomes. Moreover, the article explores the pricing of complex financial derivatives within energy markets, such as virtual power plants, swing options and gas storage.

Suggested Citation

  • Matteo Gardini & Edoardo Santilli, 2025. "A Heath–Jarrow–Morton framework for energy markets: review and applications for practitioners," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(1), pages 603-642, June.
    • Handle: RePEc:spr:decfin:v:48:y:2025:i:1:d:10.1007_s10203-024-00484-8
    DOI: 10.1007/s10203-024-00484-8
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