Oil, Gas, Electricity and Weather Derivatives
Asset Management in Energy Companies
Coal, Shipping and Freight
Complex and Exotic Options (Asian, Double-Barrier, Swing)
Interest Rates Modeling with Pure Jump Processes
Valuation of Insurance Derivatives and Securitization of Catastrophic Risk
High-Frequency Data, Pure Jump Processes and Asset Price Modeling
Hedge Funds Management and Copula Functions
Co-author 1: Andrea Roncoroni
This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a jump-reversion component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture - for the rst time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the tting is illustrated on a database of major US power markets.
Publication year: 2002
Deregulation of electricity markets is spreading worldwide at a high speed : it has been completed for some years in Scandinavia and the United Kingdom, is well under way in the United States and being embraced in most continental Western Europe outside France. Germany and the Netherlands are quite deregulated, followed by Spain. Italy is establishing power trading in a competitive environment. This represents a multi-billion spot market that is developing very quickly. And the same pattern of evolution as in the financial markets is being observed, with the growth of a variety of derivative instruments such as forward and Futures contracts swaps, plain-vanilla and exotic options.
The main problem associated with the pricing of those derivatives is that the fundamental financial models were established for stocks and bonds and do not capture the unique features of electricity, in particular the non-storability (except for hydroelectricity), the seasonality and spikes of prices, the difficulties of transportation, (existence of high voltage lines, constraints at the hubs imposed by the Kirchoff laws), not to mention the necessity for the European Community to define clear rules for cross-border electricity transmission.
The goal of this paper is to discuss the main features of electricity spot prices and investigate the pricing issues attached to power options.