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A lattice-based method for pricing electricity derivatives under the threshold model

Geman, Hélyette and Kourouvakalis, S. (2008) A lattice-based method for pricing electricity derivatives under the threshold model. Applied Mathematical Finance 15 (5-6), pp. 531-567. ISSN 1466-4313.

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Official URL: http://dx.doi.org/10.1080/13504860802379835

Abstract

Of the several models introduced for the modelling of electricity prices, the one proposed by Geman and Roncoroni, that we will refer to as the 'threshold model', has exhibited significant success in both its statistical properties and ability to accurately replicate trajectories of electricity prices. This article presents a lattice-based method for the discretization of the threshold model that allows for the pricing of derivatives, including swing options. The methodology builds on an idea presented by Bally et al. for discretizing density functions, and constructs an approximating process that is shown to be a good proxy of the original process, producing a grid that incorporates both mean reversion and jumps.

Item Type: Article
Keyword(s) / Subject(s): Electricity spot prices, threshold model, lattice-based jump representation
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 09:56
Last Modified: 17 Apr 2013 12:18
URI: http://eprints.bbk.ac.uk/id/eprint/1940

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