A New Model for Pricing Wind Power Futures

"A new approach to wind power futures pricing", Decisions in Economics and Finance (DEAF), Vol. 44, 1235-1252, December 2021

17 Pages Posted: 22 Apr 2019 Last revised: 18 Feb 2022

See all articles by Markus Hess

Markus Hess

Université Libre de Bruxelles (ULB)

Date Written: March 25, 2019

Abstract

We propose a new model for the pricing of wind power futures written on the wind power production index. Our approach is based on an arithmetic multi-factor pure-jump Ornstein-Uhlenbeck setup with time-dependent coefficients. We express the wind power production index and the corresponding futures price in terms of Fourier integrals and derive the related time dynamics. We conclude the paper by an investigation of the so-called risk premium associated with our wind power model.

Keywords: wind power futures, wind power production index, arithmetic multi-factor model, pure-jump Ornstein-Uhlenbeck process, Lévy-type process, Poisson random measure, Fourier transform, stochastic differential equation, Doléans-Dade exponential, risk premium

JEL Classification: C02, D52, G13

Suggested Citation

Hess, Markus, A New Model for Pricing Wind Power Futures (March 25, 2019). "A new approach to wind power futures pricing", Decisions in Economics and Finance (DEAF), Vol. 44, 1235-1252, December 2021, Available at SSRN: https://ssrn.com/abstract=3364189 or http://dx.doi.org/10.2139/ssrn.3364189

Markus Hess (Contact Author)

Université Libre de Bruxelles (ULB) ( email )

CP 210 Boulevard du Triomphe
Brussels, Brussels 1050
Belgium

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