Capturing the power options smile by an additive two-factor model for overlapping futures prices

Marco Piccirilli, Maren Diane Schmeck and Tiziano Vargiolu

Papers from arXiv.org

Abstract: In this paper we introduce an additive two-factor model for electricity futures prices based on Normal Inverse Gaussian L\'evy processes, that fulfills a no-overlapping-arbitrage (NOA) condition. We compute European option prices by Fourier transform methods, introduce a specific calibration procedure that takes into account no-arbitrage constraints and fit the model to power option settlement prices of the European Energy Exchange (EEX). We show that our model is able to reproduce the different levels and shapes of the implied volatility (IV) profiles displayed by options with a variety of delivery periods.

Date: 2019-10
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Capturing the power options smile by an additive two-factor model for overlapping futures prices (2021)
Working Paper: Capturing the power options smile by an additive two-factor model for overlapping futures prices (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1910.01044

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