Modeling positive electricity prices with arithmetic jump-diffusions

Markus Hess

Energy Economics, 2017, vol. 67, issue C, 496-507

Abstract: We propose a mean-reverting electricity spot price model of arithmetic jump-diffusion type yielding positive prices. Based on this approach, we derive the corresponding forward and futures price representations. We further discuss different choices for the stochastic mean level process and investigate the long-term behavior of the spot price. In the second part, we take future information available to the traders into account. The latter is modeled by initially enlarged filtrations with respect to (a) the mean level of the spot, (b) the driving diffusion component and (c) the jump term. We also derive forward and futures price representations under these enlarged filtrations. Finally, we consider the evaluation of options in the proposed models.

Keywords: Stochastic calculus; Positivity of solution to stochastic differential equation; Ornstein-Uhlenbeck process; Enlargement of filtration; Future information; Insider trading; Arithmetic jump-diffusion model; Long-term behavior; Electricity spot/forward/futures price; Option pricing (search for similar items in EconPapers)
JEL-codes: D52 G13 G14 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:67:y:2017:i:c:p:496-507

DOI: 10.1016/j.eneco.2017.08.016

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