On the control of the difference between two Brownian motions: an application to energy markets modeling

Deschatre Thomas
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Deschatre Thomas: CEREMADE, Université Paris-Dauphine, Place du maréchal De Lattre de Tassigny 75775 Paris Cedex 16, France

Dependence Modeling, 2016, vol. 4, issue 1, 23

Abstract: We derive a model based on the structure of dependence between a Brownian motion and its reflection according to a barrier. The structure of dependence presents two states of correlation: one of comonotonicity with a positive correlation and one of countermonotonicity with a negative correlation. This model of dependence between two Brownian motions B1 and B2 allows for the value of to be higher than 1/2 when x is close to 0, which is not the case when the dependence is modeled by a constant correlation. It can be used for risk management and option pricing in commodity energy markets. In particular, it allows to capture the asymmetry in the distribution of the difference between electricity prices and its combustible prices.

Keywords: Brownian motion; Copula; Asymmetry; Difference; Coupling; Barrier; Local correlation; Energy; Electricity; Commodities; Risk (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:demode:v:4:y:2016:i:1:p:161-183:n:8

DOI: 10.1515/demo-2016-0008

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