Polynomial Processes for Power Prices

19 Pages Posted: 8 May 2018

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Martin Larsson

ETH Zürich - Department of Mathematics

Tony Ware

University of Calgary

Date Written: April 25, 2018

Abstract

Polynomial processes have the property that expectations of polynomial functions (of degree n, say) of the future state of the process conditional on the current state are given by polynomials (of degree < n) of the current state. Here we explore the application of polynomial processes in the context of structural models for energy prices. We focus on the example of Alberta power prices, derive one- and two-factor models for spot prices. We examine their performance in numerical experiments, and demonstrate that the richness of the dynamics they are able to generate makes them well suited for modelling even extreme examples of energy price behaviour.

Keywords: energy prices, electricity markets, polynomial processes

JEL Classification: C32, G12, G13

Suggested Citation

Filipovic, Damir and Larsson, Martin and Ware, Tony, Polynomial Processes for Power Prices (April 25, 2018). Swiss Finance Institute Research Paper No. 18-34. Available at SSRN: https://ssrn.com/abstract=3170978 or http://dx.doi.org/10.2139/ssrn.3170978

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Martin Larsson

ETH Zürich - Department of Mathematics ( email )

Ramistrasse 101
Zurich, 8092
Switzerland

HOME PAGE: http://math.ethz.ch/~larssonm

Tony Ware

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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