Related papers: Modelling energy spot prices by volatility modulat…
Exponential L\'evy processes can be used to model the evolution of various financial variables such as FX rates, stock prices, etc. Considerable efforts have been devoted to pricing derivatives written on underliers governed by such…
As variable renewable energy increases and more demand is electrified, we expect price formation in wholesale electricity markets to transition from being dominated by fossil fuel generators to being dominated by the opportunity costs of…
In this paper we introduce an additive two-factor model for electricity futures prices based on Normal Inverse Gaussian L\'evy processes, that fulfills a no-overlapping-arbitrage (NOA) condition. We compute European option prices by Fourier…
During the last years, European intraday power markets have gained importance for balancing forecast errors due to the rising volumes of intermittent renewable generation. However, compared to day-ahead markets, the drivers for the intraday…
The European Power Exchange has introduced day-ahead auctions and continuous trading spot markets to facilitate the insertion of renewable electricity. These markets are designed to balance excess or lack of power in short time periods,…
Time variation and persistence are crucial properties of volatility that are often studied separately in energy volatility forecasting models. Here, we propose a novel approach that allows shocks with heterogeneous persistence to vary…
Local Volatility (LV) is a powerful tool for market modeling, enabling the generation of arbitrage-free scenarios calibrated to all European options. To implement LV, we need to interpolate and extrapolate option prices. This approach is…
Volterra processes appear in several applications ranging from turbulence to energy finance where they are used in the modelling of e.g. temperatures and wind and the related financial derivatives. Volterra processes are in general…
Electricity prices in liberalized markets are determined by the supply and demand for electric power, which are in turn driven by various external influences that vary strongly in time. In perfect competition, the merit order principle…
Based on forward curves modelled as Hilbert-space valued processes, we analyse the pricing of various options relevant in energy markets. In particular, we connect empirical evidence about energy forward prices known from the literature to…
The literature on volatility modelling and option pricing is a large and diverse area due to its importance and applications. This paper provides a review of the most significant volatility models and option pricing methods, beginning with…
The paper proposes a framework for modeling and analysis of the dynamics of supply, demand, and clearing prices in power system with real-time retail pricing and information asymmetry. Real-time retail pricing is characterized by passing on…
We consider the problem of valuing a European option written on an asset whose dynamics are described by an exponential L\'evy-type model. In our framework, both the volatility and jump-intensity are allowed to vary stochastically in time…
Locational Marginal Price (LMP) is a dual variable associated with supply-demand matching and represents the cost of delivering power to a particular location if the load at that location increases. In recent times it become more volatile…
In this work, we introduce a novel pricing methodology in general, possibly non-Markovian local stochastic volatility (LSV) models. We observe that by conditioning the LSV dynamics on the Brownian motion that drives the volatility, one…
The electricity market is threatened by supply scarcity, which may lead to very sharp price spikes in the spot market. On the other hand, demand-side's activities could effectively mitigate the supply scarcity and absorb most of these…
Exact path simulation of the underlying state variable is of great practical importance in simulating prices of financial derivatives or their sensitivities when there are no analytical solutions for their pricing formulas. However, in…
We study the pricing of European-style options written on forward contracts within function-valued infinite-dimensional affine stochastic volatility models. The dynamics of the underlying forward price curves are modeled within the…
This paper is devoted to the price-storage dynamics in natural gas markets. A novel stochastic path-dependent volatility model is introduced with path-dependence in both price volatility and storage increments. Model calibrations are…
It is known that the implied volatility skew of FX options demonstrates a stochastic behavior which is called stochastic skew. In this paper we create stochastic skew by assuming the spot/instantaneous variance correlation to be stochastic.…