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Market price of risk implied by Asian-style electricity options

Author

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  • Rafal Weron

    (Hugo Steinhaus Center)

Abstract

In this paper we propose a jump diffusion type model which recovers the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior. Calibration of the market price of risk allows for pricing of Asian-type options written on the spot electricity price traded at Nord Pool. The usefulness of the approach is confirmed by out-of-sample tests.

Suggested Citation

  • Rafal Weron, 2005. "Market price of risk implied by Asian-style electricity options," Econometrics 0502003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpem:0502003
    Note: Type of Document - pdf; pages: 19
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/em/papers/0502/0502003.pdf
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    References listed on IDEAS

    as
    1. Max Stevenson, 2001. "Filtering and Forecasting Spot Electricity Prices in the Increasingly Deregulated Australian Electricity Market," Research Paper Series 63, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    4. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401.
    5. Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
    6. Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(4), pages 313-335.
    7. Ingve Simonsen, 2001. "Measuring Anti-Correlations in the Nordic Electricity Spot Market by Wavelets," Papers cond-mat/0108033, arXiv.org, revised Apr 2003.
    8. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    9. Pavel Cizek & Wolfgang Karl Härdle & Rafal Weron, 2005. "Statistical Tools for Finance and Insurance," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0501.
    10. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
    11. Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September.
    12. Iivo Vehvilainen, 2002. "Basics of electricity derivative pricing in competitive markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 45-60.
    13. Simonsen, Ingve, 2003. "Measuring anti-correlations in the nordic electricity spot market by wavelets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 322(C), pages 597-606.
    14. Geman, Hélyette & Roncoroni, Andrea, 2003. "A Class of Marked Point Processes for Modelling Electricity Prices," ESSEC Working Papers DR 03004, ESSEC Research Center, ESSEC Business School.
    15. Rafal Weron & Ingve Simonsen & Piotr Wilman, 2003. "Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market," Econometrics 0303007, University Library of Munich, Germany.
    16. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
    17. Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics 0502005, University Library of Munich, Germany.
    18. Weron, R. & Kozłowska, B. & Nowicka-Zagrajek, J., 2001. "Modeling electricity loads in California: a continuous-time approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 344-350.
    19. Rafal Weron, 2001. "Measuring long-range dependence in electricity prices," Papers cond-mat/0103621, arXiv.org.
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    Citations

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    Cited by:

    1. Sandro Sapio, 2008. "Volatility-price relationships in power exchanges: A demand-supply analysis," LEM Papers Series 2008/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    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, June.
    3. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.

    More about this item

    Keywords

    Power market; Electricity price modeling; Asian option; Market price of risk; Derivatives pricing;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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