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Market price of risk implied by Asian-style electricity options

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  • Rafal Weron

    (Hugo Steinhaus Center)

Abstract

In this paper we propose a jump diffusion type model which recovers the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior. Calibration of the market price of risk allows for pricing of Asian-type options written on the spot electricity price traded at Nord Pool. The usefulness of the approach is confirmed by out-of-sample tests.

Suggested Citation

  • Rafal Weron, 2005. "Market price of risk implied by Asian-style electricity options," Econometrics 0502003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpem:0502003
    Note: Type of Document - pdf; pages: 19
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Sandro Sapio, 2008. "Volatility-price relationships in power exchanges: A demand-supply analysis," LEM Papers Series 2008/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. 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.

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    More about this item

    Keywords

    Power market; Electricity price modeling; Asian option; Market price of risk; Derivatives pricing;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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