Mean-reverting no-arbitrage additive models for forward curves in energy markets
Marco Piccirilli and
Tiziano Vargiolu ()
Energy Economics, 2019, vol. 79, issue C, 157-170
In this paper we present an additive no-arbitrage model for energy forward markets capable to exhibit mean-reversion. The model naturally incorporates term structures for both the mean-reversion level and the volatility of forward prices and it is able to reproduce the seasonalities empirically observed in gas and power markets. We also present a method to estimate the model parameters, based on quadratic variation/covariation for the volatility and on constrained maximum-likelihood estimation for the mean-reversion speed and level. We apply this technique to time series of Phelix Base forward products.
Keywords: Additive models for energy forward contracts; Mean-reversion; Heath-Jarrow-Morton methodology; Term structure of volatility; Quadratic variation/covariation; Maximum likelihood estimation (search for similar items in EconPapers)
JEL-codes: C13 C14 C32 Q40 Q49 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:79:y:2019:i:c:p:157-170
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