Market price of risk implied by Asian-style electricity options and futures

Rafał Weron ()

Energy Economics, 2008, vol. 30, issue 3, pages 1098-1115

Abstract: In this paper we propose a jump-diffusion type model which recovers the main characteristics of electricity spot price dynamics in the Nordic market, including seasonality, mean-reversion and spiky behavior. We show how the calibration of the market price of risk to actively traded futures contracts allows for efficient valuation of Nord Pool's Asian-style options written on the spot electricity price. Furthermore, we study the evolution of the market price of risk (and the risk premium) over a three year time period and compare the obtained results with those reported in the literature.

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