Spot Models and Forward Pricing

Fred Espen Benth and Paul Krühner
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Fred Espen Benth: University of Oslo
Paul Krühner: Vienna University of Economics and Business

Chapter Chapter 5 in Stochastic Models for Prices Dynamics in Energy and Commodity Markets, 2023, pp 111-141 from Springer

Abstract: Abstract Arithmetic and geometric factor models for the spot price dynamics in energy markets are reviewed, and the implied forward price dynamics from these models are derived. The forward price dynamics is analysed in the context of HJM-models under the Musiela parametrisation using convenient pricing measures based on the Girsanov and Esscher transforms. In particular, we derive a stochastic partial differential equation for the term structure dynamics and introduce the Filipović space as state space. Several particular examples are presented, including continuous-time autoregressive moving average processes applied to temperature data. We also establish a link between pricing measures and the classical theory of forward pricing which is based on storage costs and convenience yield. On the technical side, we prove a stochastic Fubini theorem tailored to our needs.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-031-40367-5_5

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DOI: 10.1007/978-3-031-40367-5_5

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