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A spot market model for pricing derivatives in electricity markets

  • Markus Burger
  • Bernhard Klar
  • Alfred Muller
  • Gero Schindlmayr

In this paper, we analyse the evolution of prices in deregulated electricity markets. We present a general model that simultaneously takes into account the following features: seasonal patterns, price spikes, mean reversion, price dependent volatilities and long term non-stationarity. We estimate the parameters of the model using historical data from the European Energy Exchange. Finally, we demonstrate how it can be used for pricing derivatives via Monte Carlo simulation.

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File URL: http://www.tandfonline.com/doi/abs/10.1088/1469-7688/4/1/010
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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 4 (2004)
Issue (Month): 1 ()
Pages: 109-122

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Handle: RePEc:taf:quantf:v:4:y:2004:i:1:p:109-122
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  1. Mihaela Manoliu & Stathis Tompaidis, 2002. "Energy futures prices: term structure models with Kalman filter estimation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 21-43.
  2. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
  3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  4. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  5. Les Clewlow & Chris Strickland, 1999. "Valuing Energy Options in a One Factor Model Fitted to Forward Prices," Research Paper Series 10, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
  7. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  8. de Jong, C.M. & Huisman, R., 2002. "Option Formulas for Mean-Reverting Power Prices with Spikes," ERIM Report Series Research in Management ERS-2002-96-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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