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A spot market model for pricing derivatives in electricity markets

Author

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

Abstract

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.

Suggested Citation

  • Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
  • Handle: RePEc:taf:quantf:v:4:y:2004:i:1:p:109-122
    DOI: 10.1088/1469-7688/4/1/010
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    5. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
    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 959-976, July.
    7. 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.
    8. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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