The Market Price of Jump Risk for Delivery Periods: Pricing of Electricity Swaps with Geometric Averaging

Annika Kemper and Maren Diane Schmeck
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Annika Kemper: Center for Mathematical Economics, Bielefeld University
Maren Diane Schmeck: Center for Mathematical Economics, Bielefeld University

No 726, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: In this paper, we extend the market price of risk for delivery periods (MPDP) of electricity swap contracts by introducing a dimension for jump risk. As introduced by Kemper et al. (2022), the MPDP arises through the use of geometric averaging while pricing electricity swaps in a geometric framework. We adjust the work by Kemper et al. (2022) in two directions: First, we examine a Merton type model taking jumps into account. Second, we transfer the model to the physical measure by implementing mean-reverting behavior. We compare swap prices resulting from the classical arithmetic (approximated) average to the geometric weighted average. Under the physical measure, we discover a decomposition of the swap’s market price of risk into the classical one and the MPDP.

Keywords: Electricity Swaps; Delivery Period; MPDP for Diffusion and Jump Risk; Mean-Reversion; Jumps; Samuelson Effect; Seasonality (search for similar items in EconPapers)
Pages: 28
Date: 2025-08-14
New Economics Papers: this item is included in nep-ene and nep-rmg
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https://pub.uni-bielefeld.de/download/3006143/3006144 First Version, 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:726

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