A Barndorff-Nielsen and Shephard model with leverage in Hilbert space for commodity forward markets

Fred Espen Benth () and Carlo Sgarra ()
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Fred Espen Benth: Oslo University
Carlo Sgarra: Università di Bari

Finance and Stochastics, 2024, vol. 28, issue 4, No 4, 1035-1076

Abstract: Abstract We propose an extension of the model introduced by Barndorff-Nielsen and Shephard, based on stochastic processes of Ornstein–Uhlenbeck type taking values in Hilbert spaces and including the leverage effect. We compute explicitly the characteristic function of the log-return and the volatility processes. By introducing a measure change of Esscher type, we provide a relation between the dynamics described with respect to the historical and the risk-neutral measures. We discuss in detail the application of the proposed model to describe the commodity forward curve dynamics in a Heath–Jarrow–Morton framework, including the modelling of forwards with delivery period occurring in energy markets and the pricing of options. For the latter, we show that a Fourier approach can be applied in this infinite-dimensional setting, relying on the attractive property of conditional Gaussianity of our stochastic volatility model. In our analysis, we study both arithmetic and geometric models of forward prices and provide appropriate martingale conditions in order to ensure arbitrage-free dynamics.

Keywords: Forward prices; Stochastic volatility; Leverage; Ornstein–Uhlenbeck; Processes in Hilbert space; Positive definite operators; Fourier transform; Lévy processes; 60G51; 60G60; 60H15; 91G20; 91G80 (search for similar items in EconPapers)
JEL-codes: C51 C53 G11 G12 G13 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00780-024-00546-0

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