Mean-Reverting Lévy Jump Dynamics in the European Power Sector
Julien Chevallier and
Stéphane Goutte
Chapter 13 in Climate Finance:Theory and Practice, 2017, pp 299-333 from World Scientific Publishing Co. Pte. Ltd.
Abstract:
This chapter analyzes the interactions between the electricity and CO2 (carbon) markets. In particular, we describe the dynamics of the fuelswitching price (from coal to gas) when taking into account carbon costs. Several stochastic processes are considered to model the fuel-switching price: (i) the Brownian motion, and (ii) the Lévy jump process. Besides, the probability density function is evaluated by considering the Gaussian case versus the Normal Inverse Gaussian (NIG) and the Variance Gamma (VG) distributions. The results unambiguously point out the need to resort to jump modeling techniques to model satisfactorily the fuel-switching price with evidence of heavy tails. The assumption of a Gaussian distribution is also clearly rejected in favor of its main competitors, whereas it is found that the NIG beats the VG distribution. Taken together, these empirical results convey implications for risk managers looking to forecast and hedge their utilities’ production.
Keywords: Climate Finance; Adaptation; Mitigation; Green Climate Fund; International Environmental Agreements; International Transfers; Economics (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:
Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814641814_0013 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814641814_0013 (text/html)
Ebook Access is available upon purchase.
Related works:
Working Paper: Mean-Reverting Lévy Jump Dynamics in the European Power Sector (2017)
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:wsi:wschap:9789814641814_0013
Ordering information: This item can be ordered from
Access Statistics for this chapter
More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().