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Dynamic copula models for the spark spread

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Listed:
  • Fred Espen Benth
  • Paul Kettler

Abstract

We propose a non-symmetric copula to model the evolution of electricity and gas prices by a bivariate non-Gaussian autoregressive process. We identify the marginal dynamics as driven by normal inverse Gaussian processes, estimating them from a series of observed UK electricity and gas spot data. We estimate the copula by modeling the difference between the empirical copula and the independent copula. We then simulate the joint process and price options written on the spark spread. We find that option prices are significantly influenced by the copula and the marginal distributions, along with the seasonality of the underlying prices.

Suggested Citation

  • Fred Espen Benth & Paul Kettler, 2010. "Dynamic copula models for the spark spread," Quantitative Finance, Taylor & Francis Journals, vol. 11(3), pages 407-421.
  • Handle: RePEc:taf:quantf:v:11:y:2010:i:3:p:407-421
    DOI: 10.1080/14697688.2010.481629
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/607 is not listed on IDEAS
    2. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
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    Cited by:

    1. Aloui, Riadh & Aïssa, Mohamed Safouane Ben & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2014. "Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management," Energy Economics, Elsevier, vol. 42(C), pages 332-342.
    2. Nemat Safarov & Colin Atkinson, 2016. "Natural gas-fired power plants valuation and optimisation under Levy copulas and regime-switching," Papers 1607.01207, arXiv.org, revised Jul 2016.
    3. PIERRET, Diane, 2013. "The systemic risk of energy markets," CORE Discussion Papers 2013018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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