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Pricing on electricity market based on coupled-continuous-time-random-walk concept

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  • Broszkiewicz-Suwaj, Ewa
  • Jurlewicz, Agnieszka

Abstract

In this paper we propose a model of electricity market based on the forward rate dynamics described by a diffusion with jumps as a generalization of the classical diffusion approach. We consider jump components resulting from a coupled continuous-time random walk (CTRW) with jump lengths proportional to the corresponding inter-jump time intervals. In the framework of the model we derive a formula for the EURO-price of a standard European call option, showing applicability of CTRW processes for pricing of financial instruments. The result, obtained by an advance theory of semimartingales, is an essential extension of the pricing formula derived in the classical diffusion model of the forward rate dynamics. It indicates an influence of both, the continuous and the jump parts of the forward rate process on the option price.

Suggested Citation

  • Broszkiewicz-Suwaj, Ewa & Jurlewicz, Agnieszka, 2008. "Pricing on electricity market based on coupled-continuous-time-random-walk concept," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(22), pages 5503-5510.
    • Handle: RePEc:eee:phsmap:v:387:y:2008:i:22:p:5503-5510
    DOI: 10.1016/j.physa.2008.05.042
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/607 is not listed on IDEAS
    2. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Science and Technology, number hsbook0601, December.
    3. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
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    Cited by:

    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. Schumer, Rina & Baeumer, Boris & Meerschaert, Mark M., 2011. "Extremal behavior of a coupled continuous time random walk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(3), pages 505-511.

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