Pricing electricity derivatives within a Markov regime-switching model

Joanna Janczura

Papers from arXiv.org

Abstract: In this paper analytic formulas for electricity derivatives are calculated. To this end, we assume that electricity spot prices follow a 3-regime Markov regime-switching model with independent spikes and drops and periodic transition matrix. Since the classical derivatives pricing methodology cannot be used in case of non-storable commodities, we employ the concept of the risk premium. The obtained theoretical results are then used for the European Energy Exchange (EEX) market data. The 3-regime model is calibrated to the spot electricity prices. Next, the risk premium is derived and used to calculate prices of European options written on spot, as well as, forward prices.

Date: 2012-03
New Economics Papers: this item is included in nep-ene and nep-fmk
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1203.5442

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