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The market price of jump risk for delivery periods: pricing of electricity swaps with geometric averaging

Author

Listed:
  • Annika Kemper

    (Center for Mathematical Economics (IMW) at Bielefeld University)

  • Maren Diane Schmeck

    (Center for Mathematical Economics (IMW) at Bielefeld University)

Abstract

In this paper, we extend the market price of risk for delivery periods (MPDP) of electricity swap contracts by introducing a dimension for jump risk. As introduced by Kemper et al. [30], the MPDP arises through the use of geometric averaging while pricing electricity swaps in a geometric framework. We adjust the work by Kemper et al. [30] in two directions: First, we examine a Merton type model taking jumps into account. Second, we transfer the model to the physical measure by implementing mean-reverting behavior. We compare swap prices resulting from the arithmetic (approximated) average to the geometric weighted average. Under the physical measure, we discover a decomposition of the swap’s market price of risk into the instantaneous market price of risk and the MPDP.

Suggested Citation

  • Annika Kemper & Maren Diane Schmeck, 2025. "The market price of jump risk for delivery periods: pricing of electricity swaps with geometric averaging," Mathematics and Financial Economics, Springer, volume 19, number 3, October.
    • Handle: RePEc:spr:mathfi:v:19:y:2025:i:2:d:10.1007_s11579-025-00383-5
    DOI: 10.1007/s11579-025-00383-5
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    More about this item

    Keywords

    Electricity swaps; Delivery period; MPDP for diffusion and jump risk; Mean-reversion; Jumps; Samuelson effect; Seasonality;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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