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UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts

Author

Listed:
  • Alvaro Cartea

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Thomas Williams

Abstract

We employ the Schwartz and Smith (2000) model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.

Suggested Citation

  • Alvaro Cartea & Thomas Williams, 2006. "UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts," Birkbeck Working Papers in Economics and Finance 0608, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0608
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    File URL: https://eprints.bbk.ac.uk/id/eprint/26935
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Interruptible supply contracts; gas markets; commodities; market price of short-term and long-term risk; multi-exercise Bermudan options; convenience yield.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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