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A Numerical Method for Pricing Electricity Derivatives for Jump-Diffusion Processes Based on Continuous Time Lattices

  • Albanese, Claudio
  • Lo, Harry
  • Stathis, Tompaidis

We present a numerical method for pricing derivatives on electricity prices. The method is based on approximating the generator of the underlying process and can be applied for stochastic processes that are combinations of diusions and jump processes. The method is accurate even in the case of processes with fast mean-reversion and jumps of large magnitude. We illustrate the speed and accuracy of the method by pricing European and Bermudan options and calculating the hedge ratios of European options for the Geman-Roncoroni model for electricity prices.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5245.

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Date of creation: 01 May 2006
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Handle: RePEc:pra:mprapa:5245
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  1. Geman, Hélyette & Roncoroni, Andréa, 2006. "Understanding the Fine Structure of Electricity Prices," Economics Papers from University Paris Dauphine 123456789/1433, Paris Dauphine University.
  2. H�lyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
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