IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v79y2019icp157-170.html
   My bibliography  Save this article

Mean-reverting no-arbitrage additive models for forward curves in energy markets

Author

Listed:
  • Latini, Luca
  • Piccirilli, Marco
  • Vargiolu, Tiziano

Abstract

In this paper we present an additive no-arbitrage model for energy forward markets capable to exhibit mean-reversion. The model naturally incorporates term structures for both the mean-reversion level and the volatility of forward prices and it is able to reproduce the seasonalities empirically observed in gas and power markets. We also present a method to estimate the model parameters, based on quadratic variation/covariation for the volatility and on constrained maximum-likelihood estimation for the mean-reversion speed and level. We apply this technique to time series of Phelix Base forward products.

Suggested Citation

  • Latini, Luca & Piccirilli, Marco & Vargiolu, Tiziano, 2019. "Mean-reverting no-arbitrage additive models for forward curves in energy markets," Energy Economics, Elsevier, vol. 79(C), pages 157-170.
    • Handle: RePEc:eee:eneeco:v:79:y:2019:i:c:p:157-170
    DOI: 10.1016/j.eneco.2018.03.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S014098831830080X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2018.03.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    2. Thilo Meyer-Brandis & Peter Tankov, 2008. "Multi-Factor Jump-Diffusion Models Of Electricity Prices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(05), pages 503-528.
    3. Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
    4. 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, August.
    5. 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.
    6. Kiesel, Rüdiger & Paraschiv, Florentina, 2017. "Econometric analysis of 15-minute intraday electricity prices," Energy Economics, Elsevier, vol. 64(C), pages 77-90.
    7. Ole E. Barndorff‐Nielsen & Neil Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280, May.
    8. 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..
    9. Fred Espen Benth & Marco Piccirilli & Tiziano Vargiolu, 2017. "Additive energy forward curves in a Heath-Jarrow-Morton framework," Papers 1709.03310, arXiv.org, revised Jun 2018.
    10. Benth, Fred Espen & Koekebakker, Steen, 2008. "Stochastic modeling of financial electricity contracts," Energy Economics, Elsevier, vol. 30(3), pages 1116-1157, May.
    11. Benth, Fred Espen & Kiesel, Rüdiger & Nazarova, Anna, 2012. "A critical empirical study of three electricity spot price models," Energy Economics, Elsevier, vol. 34(5), pages 1589-1616.
    12. Rudiger Kiesel & Gero Schindlmayr & Reik Borger, 2009. "A two-factor model for the electricity forward market," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 279-287.
    13. Lucia, Julio J. & Schwartz, Eduardo, 2000. "Electricity prices and power derivatives: Evidence from the Nordic Power Exchange," University of California at Los Angeles, Anderson Graduate School of Management qt12w8v7jj, Anderson Graduate School of Management, UCLA.
    14. Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
    15. Fanone, Enzo & Gamba, Andrea & Prokopczuk, Marcel, 2013. "The case of negative day-ahead electricity prices," Energy Economics, Elsevier, vol. 35(C), pages 22-34.
    16. repec:dau:papers:123456789/1433 is not listed on IDEAS
    17. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Olivier Feron & Pierre Gruet, 2020. "Estimation of the number of factors in a multi-factorial Heath-Jarrow-Morton model in electricity markets," Working Papers hal-02880824, HAL.
    2. Piccirilli, Marco & Schmeck, Maren Diane & Vargiolu, Tiziano, 2021. "Capturing the power options smile by an additive two-factor model for overlapping futures prices," Energy Economics, Elsevier, vol. 95(C).
    3. Wieger Hinderks & Ralf Korn & Andreas Wagner, 2020. "Unifying the theory of storage and the risk premium by an unobservable intrinsic electricity price," Papers 2011.03987, arXiv.org.
    4. Piergiacomo Sabino, 2021. "Normal Tempered Stable Processes and the Pricing of Energy Derivatives," Papers 2105.03071, arXiv.org.
    5. Fred Espen Benth & Marco Piccirilli & Tiziano Vargiolu, 2017. "Additive energy forward curves in a Heath-Jarrow-Morton framework," Papers 1709.03310, arXiv.org, revised Jun 2018.
    6. Thomas Deschatre & Olivier F'eron & Pierre Gruet, 2021. "A survey of electricity spot and futures price models for risk management applications," Papers 2103.16918, arXiv.org, revised Jul 2021.
    7. Marco Piccirilli & Tiziano Vargiolu, 2018. "Optimal Portfolio in Intraday Electricity Markets Modelled by L\'evy-Ornstein-Uhlenbeck Processes," Papers 1807.01979, arXiv.org.
    8. Wieger Hinderks & Andreas Wagner & Ralf Korn, 2018. "A structural Heath-Jarrow-Morton framework for consistent intraday, spot, and futures electricity prices," Papers 1803.08831, arXiv.org, revised Jan 2019.
    9. Roberto Baviera & Pietro Manzoni, 2024. "Fast and General Simulation of L\'evy-driven OU processes for Energy Derivatives," Papers 2401.15483, arXiv.org, revised Sep 2024.
    10. Fred Espen Benth & Carlo Sgarra, 2024. "A Barndorff-Nielsen and Shephard model with leverage in Hilbert space for commodity forward markets," Finance and Stochastics, Springer, vol. 28(4), pages 1035-1076, October.
    11. Giorgia Callegaro & Andrea Mazzoran & Carlo Sgarra, 2019. "A Self-Exciting Modelling Framework for Forward Prices in Power Markets," Papers 1910.13286, arXiv.org.
    12. Maren Diane Schmeck & Stefan Schwerin, 2021. "The Effect of Mean-Reverting Processes in the Pricing of Options in the Energy Market: An Arithmetic Approach," Risks, MDPI, vol. 9(5), pages 1-19, May.
    13. Piergiacomo Sabino, 2021. "Pricing Energy Derivatives in Markets Driven by Tempered Stable and CGMY Processes of Ornstein-Uhlenbeck Type," Papers 2103.13252, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Deschatre, Thomas & Féron, Olivier & Gruet, Pierre, 2021. "A survey of electricity spot and futures price models for risk management applications," Energy Economics, Elsevier, vol. 102(C).
    2. Iván Blanco, Juan Ignacio Peña, and Rosa Rodriguez, 2018. "Modelling Electricity Swaps with Stochastic Forward Premium Models," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    3. Fred Espen Benth & Marco Piccirilli & Tiziano Vargiolu, 2017. "Additive energy forward curves in a Heath-Jarrow-Morton framework," Papers 1709.03310, arXiv.org, revised Jun 2018.
    4. Benth, Fred Espen & Paraschiv, Florentina, 2018. "A space-time random field model for electricity forward prices," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 203-216.
    5. Gonzalez, Jhonny & Moriarty, John & Palczewski, Jan, 2017. "Bayesian calibration and number of jump components in electricity spot price models," Energy Economics, Elsevier, vol. 65(C), pages 375-388.
    6. Bannör, Karl & Kiesel, Rüdiger & Nazarova, Anna & Scherer, Matthias, 2016. "Parametric model risk and power plant valuation," Energy Economics, Elsevier, vol. 59(C), pages 423-434.
    7. Marco Piccirilli & Tiziano Vargiolu, 2018. "Optimal Portfolio in Intraday Electricity Markets Modelled by L\'evy-Ornstein-Uhlenbeck Processes," Papers 1807.01979, arXiv.org.
    8. Piccirilli, Marco & Schmeck, Maren Diane & Vargiolu, Tiziano, 2021. "Capturing the power options smile by an additive two-factor model for overlapping futures prices," Energy Economics, Elsevier, vol. 95(C).
    9. Rafal Weron & Florian Ziel, 2018. "Electricity price forecasting," HSC Research Reports HSC/18/08, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    10. Maren Diane Schmeck & Stefan Schwerin, 2021. "The Effect of Mean-Reverting Processes in the Pricing of Options in the Energy Market: An Arithmetic Approach," Risks, MDPI, vol. 9(5), pages 1-19, May.
    11. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    12. Bennedsen, Mikkel, 2017. "A rough multi-factor model of electricity spot prices," Energy Economics, Elsevier, vol. 63(C), pages 301-313.
    13. Farshid Mehrdoust & Idin Noorani, 2023. "Valuation of Spark-Spread Option Written on Electricity and Gas Forward Contracts Under Two-Factor Models with Non-Gaussian Lévy Processes," Computational Economics, Springer;Society for Computational Economics, vol. 61(2), pages 807-853, February.
    14. Benth, Fred Espen & Paraschiv, Florentina, 2016. "A Structural Model for Electricity Forward Prices," Working Papers on Finance 1611, University of St. Gallen, School of Finance.
    15. Mikkel Bennedsen, 2015. "Rough electricity: a new fractal multi-factor model of electricity spot prices," CREATES Research Papers 2015-42, Department of Economics and Business Economics, Aarhus University.
    16. Thomas Deschatre & Olivier F'eron & Pierre Gruet, 2021. "A survey of electricity spot and futures price models for risk management applications," Papers 2103.16918, arXiv.org, revised Jul 2021.
    17. Hinderks, W.J. & Wagner, A., 2020. "Factor models in the German electricity market: Stylized facts, seasonality, and calibration," Energy Economics, Elsevier, vol. 85(C).
    18. Nowotarski, Jakub & Tomczyk, Jakub & Weron, Rafał, 2013. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," Energy Economics, Elsevier, vol. 39(C), pages 13-27.
    19. Marcelo G. Figueroa, 2006. "Pricing Multiple Interruptible-Swing Contracts," Birkbeck Working Papers in Economics and Finance 0606, Birkbeck, Department of Economics, Mathematics & Statistics.
    20. Michel Culot & Valérie Goffin & Steve Lawford & Sébastien de Meten & Yves Smeers, 2013. "Practical stochastic modelling of electricity prices," Post-Print hal-01021603, HAL.

    More about this item

    Keywords

    Additive models for energy forward contracts; Mean-reversion; Heath-Jarrow-Morton methodology; Term structure of volatility; Quadratic variation/covariation; Maximum likelihood estimation;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:79:y:2019:i:c:p:157-170. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.