Stochastic Modeling and Pricing of Energy Markets’ Contracts with Local Stochastic Delayed and Jumped Volatilities

Anatoliy Swishchuk

Chapter 11 in Handbook of Energy Finance:Theories, Practices and Simulations, 2020, pp 247-266 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this Chapter, we concentrate on stochastic modeling and pricing of energy markets’ contracts for stochastic volatilities with delay and jumps. Our model of stochastic volatility exhibits jumps and also past-dependence: the behavior of a stock price right after a given time t not only depends on the situation at t, but also on the whole past (history) of the process S(t) up to time t. The spot price process S(t) is modeled by the Ornstein–Uhlenbeck (OU) process driven by independent increments process. The basic products in these markets are spot, futures and forward contracts and options written on these. We study forwards and swaps. A numerical example is presented for stochastic volatility with delay using the Henry Hub daily natural gas data (1997–2011).

Keywords: Energy Finance; Financial and Economic Modeling; Volatility; Forecasting; Quantitative Finance; Energy Markets (search for similar items in EconPapers)
JEL-codes: G20 G32 Q40 (search for similar items in EconPapers)
Date: 2020
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