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

Annika Kemper and Maren Diane Schmeck
Additional contact information
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-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://pub.uni-bielefeld.de/download/3006143/3006144 First Version, 2023 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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

Access Statistics for this paper

More papers in Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University Contact information at EDIRC.
Bibliographic data for series maintained by Bettina Weingarten ().