A Multivariate Non-Gaussian Stochastic Volatility Model with Leverage for Energy Markets

31 Pages Posted: 28 Oct 2009

See all articles by Linda Vos

Linda Vos

University of Agder; Centre of mathematics for applications (CMA), University of Oslo

Fred Espen Benth

University of Oslo

Date Written: October 27, 2009

Abstract

Spot prices in energy markets exhibit special features like price spikes, mean-reversion inverse, stochastic volatility, inverse leverage effect and co-integration between the different commodities. In this paper a multivariate stochastic volatility model is introduced which captures these features. Second order structure and stationary issues of the model are analysed. Moreover the implied multivariate forward model is derived. Due to the flexibility of the model stylized facts of the forward curve as contango, backwardation and humps are explained. Moreover, a transformed-based method to price options on the forward is described, where fast and precise algorithms for price computations can be implemented. A simulation method for Monte Carlo generation of price paths is introduced.

Keywords: Energy markets, Ornstein-Uhlenbeck process, Stochastic volatility, Subordinators

Suggested Citation

Vos, Linda and Benth, Fred Espen, A Multivariate Non-Gaussian Stochastic Volatility Model with Leverage for Energy Markets (October 27, 2009). Available at SSRN: https://ssrn.com/abstract=1495156 or http://dx.doi.org/10.2139/ssrn.1495156

Linda Vos (Contact Author)

University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Centre of mathematics for applications (CMA), University of Oslo ( email )

P.O. Box 1053 Blindern
Oslo, Oslo NO-0316
Norway

Fred Espen Benth

University of Oslo ( email )

Center of Mathematics for Applications
Oslo, N-0317
Norway

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