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Polynomial processes for power prices

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  • Damir Filipovic
  • Martin Larsson
  • Tony Ware

Abstract

Polynomial processes have the property that expectations of polynomial functions (of degree $n$, say) of the future state of the process conditional on the current state are given by polynomials (of degree $\leq n$) of the current state. Here we explore the application of polynomial processes in the context of structural models for energy prices. We focus on the example of Alberta power prices, derive one- and two-factor models for spot prices. We examine their performance in numerical experiments, and demonstrate that the richness of the dynamics they are able to generate makes them well suited for modelling even extreme examples of energy price behaviour.

Suggested Citation

  • Damir Filipovic & Martin Larsson & Tony Ware, 2017. "Polynomial processes for power prices," Papers 1710.10293, arXiv.org, revised Apr 2018.
    • Handle: RePEc:arx:papers:1710.10293
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    References listed on IDEAS

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    Cited by:

    1. Xi Kleisinger-Yu & Vlatka Komaric & Martin Larsson & Markus Regez, 2019. "A multi-factor polynomial framework for long-term electricity forwards with delivery period," Papers 1908.08954, arXiv.org, revised Jun 2020.
    2. Boonstra, Boris C. & Oosterlee, Cornelis W., 2021. "Valuation of electricity storage contracts using the COS method," Applied Mathematics and Computation, Elsevier, vol. 410(C).
    3. Fred Espen Benth & Silvia Lavagnini, 2019. "Correlators of Polynomial Processes," Papers 1906.11320, arXiv.org, revised Apr 2021.
    4. Krisztina Katona & Christina Sklibosios Nikitopoulos & Erik Schlögl, 2023. "A Hyperbolic Bid Stack Approach to Electricity Price Modelling," Risks, MDPI, vol. 11(8), pages 1-39, August.
    5. Filipović, Damir & Larsson, Martin & Pulido, Sergio, 2020. "Markov cubature rules for polynomial processes," Stochastic Processes and their Applications, Elsevier, vol. 130(4), pages 1947-1971.

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