Pricing Electricity Forwards under Future Information on the Stochastic Mean-Reversion Level

Abstract

We extend the arithmetic multi-factor electricity spot price model proposed by Benth, Kallsen & Meyer-Brandis by adding stochastic mean-level processes to their model and by taking additional information on the future behavior of these mean-level processes into account. The available anticipative information is modeled by an initially enlarged filtration in our paper. We further derive pricing formulas for electricity forwards under future information and investigate the associated information premium.

Keywords: electricity spot/forward/futures price, arithmetic multi-factor model, pure-jump Ornstein-Uhlenbeck process, Lévy-type process, Poisson random measure, stochastic differential equation, initially enlarged filtration, information premium

JEL Classification: C02, D43, D52, D82, G13, G14