On the control of the difference between two Brownian motions: an application to energy markets modeling

DOI10.1515/DEMO-2016-0008MaRDI QIDQ324996zbMATH OpenOpenAlexFDO

Authors Thomas Deschatre

Publication date 17 October 2016

Published in Dependence Modeling (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported

Full work available at URL https://arxiv.org/abs/2101.03041

zbMATH Keywords

asymmetrycopulaBrownian motionriskcouplingenergy marketsbarriercommoditieslocal correlation

Mathematics Subject Classification ID

Multivariate analysis (62H99) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Diffusion processes (60J60) Brownian motion (60J65) Continuous-time Markov processes on general state spaces (60J25) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stochastic models in economics (91B70)

Abstract: We derive a model based on the structure of dependence between a Brownian motion and its reflection according to a barrier. The structure of dependence presents two states of correlation: one of comonotonicity with a positive correlation and one of countermonotonicity with a negative correlation. This model of dependence between two Brownian motions $B^1$ and $B^2$ allows for the value of $mathbbPleft(B_t^1-B_t^{2}geqxight)$ to be higher than $frac12$ when $x$ is close to 0, which is not the case when the dependence is modeled by a constant correlation. It can be used for risk management and option pricing in commodity energy markets. In particular, it allows to capture the asymmetry in the distribution of the difference between electricity prices and its combustible prices.

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Cites work

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• On the control of the difference between two Brownian motions: a dynamic copula approach

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