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European Option Pricing of electricity under exponential functional of L\'evy processes with Price-Cap principle

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  • Martin Kegnenlezom
  • Patrice Takam Soh
  • Antoine-Marie Bogso
  • Yves Emvudu Wono

Abstract

We propose a new model for electricity pricing based on the price cap principle. The particularity of the model is that the asset price is an exponential functional of a jump L\'evy process. This model can capture both mean reversion and jumps which are observed in electricity market. It is shown that the value of an European option of this asset is the unique viscosity solution of a partial integro-differential equation (PIDE). A numerical approximation of this solution by the finite differences method is provided. The consistency, stability and convergence results of the scheme are given. Numerical simulations are performed under a smooth initial condition.

Suggested Citation

  • Martin Kegnenlezom & Patrice Takam Soh & Antoine-Marie Bogso & Yves Emvudu Wono, 2019. "European Option Pricing of electricity under exponential functional of L\'evy processes with Price-Cap principle," Papers 1906.10888, arXiv.org.
    • Handle: RePEc:arx:papers:1906.10888
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    References listed on IDEAS

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