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Fast Pricing of Energy Derivatives with Mean-Reverting Jump-diffusion Processes

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  • Piergiacomo Sabino
  • Nicola Cufaro Petroni

Abstract

Most energy and commodity markets exhibit mean-reversion and occasional distinctive price spikes, which result in demand for derivative products which protect the holder against high prices. To this end, in this paper we present a few fast and efficient methodologies for the exact simulation of the spot price dynamics modelled as the exponential of the sum of a Gaussian Ornstein-Uhlenbeck process and an independent pure jump process, where the latter one is driven by a compound Poisson process with (bilateral) exponentially distributed jumps. These methodologies are finally applied to the pricing of Asian options, gas and hydro storages and swing options under different combinations of jump-diffusion market models, and the apparent computational advantages of the proposed procedures are emphasized.

Suggested Citation

  • Piergiacomo Sabino & Nicola Cufaro Petroni, 2021. "Fast Pricing of Energy Derivatives with Mean-Reverting Jump-diffusion Processes," Applied Mathematical Finance, Taylor & Francis Journals, vol. 28(1), pages 1-22, January.
    • Handle: RePEc:taf:apmtfi:v:28:y:2021:i:1:p:1-22
    DOI: 10.1080/1350486X.2021.1909488
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    File URL: http://hdl.handle.net/10.1080/1350486X.2021.1909488
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    Cited by:

    1. Matteo Gardini & Piergiacomo Sabino & Emanuela Sasso, 2021. "Correlating Lévy processes with self-decomposability: applications to energy markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1253-1280, December.

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