A Two-Factor Model for the Electricity Forward Market

Quantitative Finance, Vol. 9, No. 3, 2009

Posted: 2 May 2007 Last revised: 16 Nov 2009

See all articles by Ruediger Kiesel

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science

Gero Schindlmayr

affiliation not provided to SSRN

Reik H. Boerger

RWE AG

Date Written: February 1, 2007

Abstract

This paper provides a two-factor model for electricity futures, which captures the main features of the market and fits the term structure of volatility. The approach extends the one-factor-model of Clewlow and Strickland to a two-factor model and modifies it to make it applicable to the electricity market. We will especially take care of the existence of delivery periods in the underlying futures. Additionally, the model is calibrated to options on electricity futures and its performance for practical application is discussed.

Keywords: Energy derivatives, Futures, Option, Two-Factor Model, Volatility Term Structure

Suggested Citation

Kiesel, Ruediger and Schindlmayr, Gero and Boerger, Reik H., A Two-Factor Model for the Electricity Forward Market (February 1, 2007). Quantitative Finance, Vol. 9, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=982784

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science ( email )

Essen, 45117
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/

Gero Schindlmayr

affiliation not provided to SSRN ( email )

No Address Available

Reik H. Boerger (Contact Author)

RWE AG ( email )

Essen, DE
Germany

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