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UK gas markets: the market price of risk and applications to multiple interruptible supply contracts

Cartea, Alvaro and Williams, T. (2008) UK gas markets: the market price of risk and applications to multiple interruptible supply contracts. Energy Economics 30 (3), pp. 829-846. ISSN 0140-9883.

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Official URL: http://dx.doi.org/10.1016/j.eneco.2007.03.001

Abstract

We employ the Schwartz and Smith [Schwartz, E., and J. Smith, 2000, Short-term variations and long-term dynamics in commodity prices, Management Science 46, 893–911.] model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.

Item Type: Article
Keyword(s) / Subject(s): Interruptible supply contracts, gas markets, commodities, market price of short-term and long-term risk, multi-exercise Bermudan options, convenience yield
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 01 Feb 2011 11:09
Last Modified: 17 Apr 2013 12:18
URI: http://eprints.bbk.ac.uk/id/eprint/1930

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