Approximation of forward curve models in commodity markets with arbitrage-free finite-dimensional models

Fred Espen Benth () and Paul Krühner ()
Additional contact information
Fred Espen Benth: University of Oslo
Paul Krühner: The University of Liverpool

Finance and Stochastics, 2018, vol. 22, issue 2, No 4, 327-366

Abstract: Abstract In this paper, we show how to approximate Heath–Jarrow–Morton dynamics for the forward prices in commodity markets with arbitrage-free models which have a finite-dimensional state space. Moreover, we recover a closed-form representation of the forward price dynamics in the approximation models and derive the rate of convergence to the true dynamics uniformly over an interval of time to maturity under certain additional smoothness conditions. In the Markovian case, we can strengthen the convergence to be uniform over time as well. Our results are based on the construction of a convenient Riesz basis on the state space of the term structure dynamics.

Keywords: Energy markets; Heath–Jarrow–Morton modelling; Nonharmonic Fourier analysis; Arbitrage-free approximations; 60H15; 91B24; 91G20 (search for similar items in EconPapers)
JEL-codes: C02 C63 G13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-018-0355-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-018-0355-9

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-018-0355-9

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().