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A Two-Factor Model for the Electricity Forward Market

[journal article]

Böerger, Reik H.; Kiesel, Rüdiger; Schindlmayr, Gero

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Further Details
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.
Classification Economic Sectors; Economic Statistics, Econometrics, Business Informatics
Method theory application
Free Keywords Quantitative finance; Weather derivative pricing; Applied mathematical finance; Time series analysis
Document language English
Publication Year 2009
Page/Pages p. 279-287
Journal Quantitative Finance, 9 (2009) 3
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)