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The Market Price of Jump Risk for Delivery Periods: Pricing of Electricity Swaps with Geometric Averaging

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  • Kemper, Annika

    (Center for Mathematical Economics, Bielefeld University)

  • Schmeck, Maren Diane

    (Center for Mathematical Economics, 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. (2022), 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. (2022) 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 classical 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 classical one and the MPDP.

Suggested Citation

  • Kemper, Annika & Schmeck, Maren Diane, 2025. "The Market Price of Jump Risk for Delivery Periods: Pricing of Electricity Swaps with Geometric Averaging," Center for Mathematical Economics Working Papers 726, Center for Mathematical Economics, Bielefeld University.
    • Handle: RePEc:bie:wpaper:726
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    File URL: https://pub.uni-bielefeld.de/download/3006143/3006144
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    References listed on IDEAS

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    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. Fred Espen Benth & Jūratė Šaltytė Benth & Steen Koekebakker, 2008. "Stochastic Modeling of Electricity and Related Markets," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6811, January.
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