Dynamic copula models for the spark spread

Fred Espen Benth and Paul Kettler ()

Quantitative Finance, 2010, vol. 11, issue 3, 407-421

Abstract: We propose a non-symmetric copula to model the evolution of electricity and gas prices by a bivariate non-Gaussian autoregressive process. We identify the marginal dynamics as driven by normal inverse Gaussian processes, estimating them from a series of observed UK electricity and gas spot data. We estimate the copula by modeling the difference between the empirical copula and the independent copula. We then simulate the joint process and price options written on the spark spread. We find that option prices are significantly influenced by the copula and the marginal distributions, along with the seasonality of the underlying prices.

Keywords: Mathematical finance; Copulas; Derivative pricing models; Asymmetry; Empirical time series analysis; Energy derivatives; Levy process; Numerical simulation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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DOI: 10.1080/14697688.2010.481629

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