Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality

29 Pages Posted: 4 Oct 2006  

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Marcelo G. Figueroa

University of London - Birkbeck College

Abstract

In this paper we present a mean-reverting jump diffusion model for the electricity spot price. We obtain a closed-form solution for forward contracts and calibrate it to market data from England and Wales. Finally, based on the calibrated forward curve we present months, quarters, and seasons-ahead forward surfaces.

Keywords: Energy derivatives, electricity, forward curve

JEL Classification: G12, G13

Suggested Citation

Cartea, Álvaro and Figueroa, Marcelo G., Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality. Applied Mathematical Finance, Vol. 12, No. 4, December 2005. Available at SSRN: https://ssrn.com/abstract=592262

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Marcelo G. Figueroa

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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