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Modelling electricity forward curve dynamics in the Italian market

Author

Listed:
  • Silvana Musti
  • Viviana Fanelli

Abstract

In this paper we discuss the modelling of electricity contracts traded in the Italian market. We directly model the forward price of the electricity. We apply the Heath Jarrow Morton model in order to simulate the forward rate dynamics and evaluate first the forward price with instantaneous delivery time and then the "swap price" with delivery over a period. We use a regime-switching model to introduce jumps and spikes that depend on the state of the system. Thus the model describes the properties of the electricity price dynamics both in a base stable regime and in a spike regime. A numerical algorithm is developed to simulate swap price trajectories.

Suggested Citation

  • Silvana Musti & Viviana Fanelli, 2008. "Modelling electricity forward curve dynamics in the Italian market," Quaderni DSEMS 20-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    • Handle: RePEc:ufg:qdsems:20-2008
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    File URL: http://www.economia.unifg.it/sites/sd01/files/allegatiparagrafo/29-11-2016/q202008.pdf
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    References listed on IDEAS

    as
    1. Chiarella, Carl & Clewlow, Les & Musti, Silvana, 2005. "A volatility decomposition control variate technique for Monte Carlo simulations of Heath Jarrow Morton models," European Journal of Operational Research, Elsevier, vol. 161(2), pages 325-336, March.
    2. Robert Jarrow, 2017. "Operational Risk," World Scientific Book Chapters, in: THE ECONOMIC FOUNDATIONS OF RISK MANAGEMENT Theory, Practice, and Applications, chapter 8, pages 69-70, World Scientific Publishing Co. Pte. Ltd..
    3. Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    5. repec:dau:papers:123456789/1433 is not listed on IDEAS
    6. Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September.
    7. Hélyette 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.
    8. Benth, Fred Espen & Koekebakker, Steen, 2008. "Stochastic modeling of financial electricity contracts," Energy Economics, Elsevier, vol. 30(3), pages 1116-1157, May.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Emanuele Fabbiani & Andrea Marziali & Giuseppe De Nicolao, 2018. "Fast calibration of two-factor models for energy option pricing," Papers 1809.03941, arXiv.org, revised Dec 2020.

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    More about this item

    Keywords

    Electricity prices; HJM model; Jump-diffusions; Regimeswitches; Spikes.;
    All these keywords.

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