Modelling energy spot prices by volatility modulated Lévy-driven Volterra processes

DOI10.3150/12-BEJ476zbMATH Open1337.60088arXiv1307.6332OpenAlexW3122603499MaRDI QIDQ358131FDOQ358131

Authors: Almut E. D. Veraart, Fred Espen Benth, Ole E. Barndorff-Nielsen 

Publication date: 16 August 2013

Published in: Bernoulli (Search for Journal in Brave)

Abstract: This paper introduces the class of volatility modulated L'{e}vy-driven Volterra (VMLV) processes and their important subclass of L'{e}vy semistationary (LSS) processes as a new framework for modelling energy spot prices. The main modelling idea consists of four principles: First, deseasonalised spot prices can be modelled directly in stationarity. Second, stochastic volatility is regarded as a key factor for modelling energy spot prices. Third, the model allows for the possibility of jumps and extreme spikes and, lastly, it features great flexibility in terms of modelling the autocorrelation structure and the Samuelson effect. We provide a detailed analysis of the probabilistic properties of VMLV processes and show how they can capture many stylised facts of energy markets. Further, we derive forward prices based on our new spot price models and discuss option pricing. An empirical example based on electricity spot prices from the European Energy Exchange confirms the practical relevance of our new modelling framework.

Full work available at URL: https://arxiv.org/abs/1307.6332

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zbMATH Keywords

stochastic integrationenergy marketsforward pricesSamuelson effectspot pricessemistationary Lévy processesvolatility modulated Lévy-driven Volterra processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Generalizations of martingales (60G48) Stochastic integrals (60H05) Financial applications of other theories (91G80)

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Uses Software

• ghyp
• QRM

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