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

Decisions in Economics and Finance (DEAF), Vol. 43, No. 2, 751-767, December 2020

12 Pages Posted: 10 Jul 2019 Last revised: 18 Feb 2022

See all articles by Markus Hess

Markus Hess

Université Libre de Bruxelles (ULB)

Date Written: July 6, 2020

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

Suggested Citation

Hess, Markus, Pricing Electricity Forwards under Future Information on the Stochastic Mean-Reversion Level (July 6, 2020). Decisions in Economics and Finance (DEAF), Vol. 43, No. 2, 751-767, December 2020, Available at SSRN: https://ssrn.com/abstract=3417138 or http://dx.doi.org/10.2139/ssrn.3417138

Markus Hess (Contact Author)

Université Libre de Bruxelles (ULB) ( email )

CP 210 Boulevard du Triomphe
Brussels, Brussels 1050
Belgium

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