Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality (original) (raw)

29 Pages Posted: 4 Oct 2006

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Marcelo G. Figueroa

University of London - Birkbeck College

Abstract

In this paper we present a mean-reverting jump diffusion model for the electricity spot price. We obtain a closed-form solution for forward contracts and calibrate it to market data from England and Wales. Finally, based on the calibrated forward curve we present months, quarters, and seasons-ahead forward surfaces.

Keywords: Energy derivatives, electricity, forward curve

JEL Classification: G12, G13

Suggested Citation: Suggested Citation

Cartea, Álvaro and Figueroa, Marcelo G., Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality. Applied Mathematical Finance, Vol. 12, No. 4, December 2005, Available at SSRN: https://ssrn.com/abstract=592262