Approximation of forward curve models in commodity markets with arbitrage-free finite-dimensional models
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Publication:1709604
DOI10.1007/S00780-018-0355-9zbMATH Open1422.91565arXiv1512.05983OpenAlexW2962692378WikidataQ130207582 ScholiaQ130207582MaRDI QIDQ1709604FDOQ1709604
Authors: Fred Espen Benth, Paul Krühner 
Publication date: 6 April 2018
Published in: Finance and Stochastics (Search for Journal in Brave)
Abstract: In this paper we show how to approximate a Heath-Jarrow-Morton dynamics for the forward prices in commodity markets with arbitrage-free models which have a finite dimensional state space. Moreover, we recover a closed form representation of the forward price dynamics in the approximation models and derive the rate of convergence uniformly over an interval of time to maturity to the true dynamics under certain additional smoothness conditions. In the Markovian case we can strengthen the convergence to be uniform over time as well. Our results are based on the construction of a convenient Riesz basis on the state space of the term structure dynamics.
Full work available at URL: https://arxiv.org/abs/1512.05983
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Cited In (6)
- Representation of infinite-dimensional forward price models in commodity markets
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- Derivatives pricing in energy markets: an infinite-dimensional approach
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- Closed-form solutions via the invariant approach for one-factor commodity models
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