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Calibration of the multifactor HJM model for energy market

Author

Listed:
  • Ewa Broszkiewicz-Suwaj
  • Aleksander Weron

Abstract

The purpose of this paper is to show that using the toolkit of interest rate theory, already well known in financial engineering as the HJM model [D. Heath, R. Jarrow, A. Morton, Econometrica 60, 77 (1992)], it is possible to derive explicite option pricing formula and calibrate the theoretical model to the empirical electricity market. The analysis is illustrated by numerical cases from the European Energy Exchange (EEX) in Leipzig. The multi-factor versus one-factor HJM models are compared.

Suggested Citation

  • Ewa Broszkiewicz-Suwaj & Aleksander Weron, 2005. "Calibration of the multifactor HJM model for energy market," HSC Research Reports HSC/05/03, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    • Handle: RePEc:wuu:wpaper:hsc0503
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    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_05_03.pdf
    File Function: Original version, 2005
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    References listed on IDEAS

    as
    1. Rafal Weron, 2005. "Heavy tails and electricity prices," HSC Research Reports HSC/05/02, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    2. Baxter,Martin & Rennie,Andrew, 1996. "Financial Calculus," Cambridge Books, Cambridge University Press, number 9780521552899, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Joanna Janczura & Aleksander Weron, 2008. "Modelling energy forward prices," HSC Research Reports HSC/08/03, Hugo Steinhaus Center, Wroclaw University of Technology.
    2. 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.
    3. Valerii Maltsev & Michael Pokojovy, 2021. "Applying Heath-Jarrow-Morton Model to Forecasting the US Treasury Daily Yield Curve Rates," Mathematics, MDPI, vol. 9(2), pages 1-25, January.

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    More about this item

    Keywords

    Electricity market; HJM model; calibration; option pricing;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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