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Hawkes Processes in Energy Markets: Modelling, Estimation and Derivatives Pricing

In: Quantitative Energy Finance

Author

Listed:
  • Riccardo Brignone

    (University of Freiburg, Department of Quantitative Finance, Institute for Economic Research)

  • Luca Gonzato

    (University of Vienna, Department of Statistics and Operations Research)

  • Carlo Sgarra

    (Università degli studi di Bari “Aldo Moro”, Department of Mathematics)

Abstract

The purpose of the present contribution is to illustrate the extensive use of Hawkes processes in modeling price dynamics in energy markets and to show how they can be applied for derivatives pricing. After a review of the literature devoted to the subject and on the exact simulation of Hawkes processes, we introduce a simple, yet useful, Hawkes-based model for energy spot prices. We present the model under the historical measure and illustrate a structure preserving change of measure, allowing to specify a risk-neutral dynamics. Then, we propose an effective estimation methodology based on particle filtering. Finally, we show how to perform exotic derivatives pricing both through exact simulation and characteristic function inversion techniques.

Suggested Citation

  • Riccardo Brignone & Luca Gonzato & Carlo Sgarra, 2024. "Hawkes Processes in Energy Markets: Modelling, Estimation and Derivatives Pricing," Springer Books, in: Fred Espen Benth & Almut E. D. Veraart (ed.), Quantitative Energy Finance, pages 41-72, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-50597-3_2
    DOI: 10.1007/978-3-031-50597-3_2
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