Pricing Electricity Swaptions under a Stochastic Volatility Term-Structure Model
(2012) In Journal of Energy Markets Forthcoming.- Abstract
- This paper suggests a stochastic volatility
term-structure model applied to the pricing of electricity
swaptions in the Nord Pool market. The volatility structure in the
model is specified as a product of a time-dependent function that
handles the maturity effect, and a Cox-Ingersoll-Ross process that
captures the volatility smile. We employ a Fourier based approach
to price electricity swaptions and perform an empirical analysis
by calibrating the model to a data set consisting of more than
12000 implied volatilities corresponding to swaption prices from
the Nord Pool market. To our knowledge this is one of the first
studies of the volatility smile... (More) - This paper suggests a stochastic volatility
term-structure model applied to the pricing of electricity
swaptions in the Nord Pool market. The volatility structure in the
model is specified as a product of a time-dependent function that
handles the maturity effect, and a Cox-Ingersoll-Ross process that
captures the volatility smile. We employ a Fourier based approach
to price electricity swaptions and perform an empirical analysis
by calibrating the model to a data set consisting of more than
12000 implied volatilities corresponding to swaption prices from
the Nord Pool market. To our knowledge this is one of the first
studies of the volatility smile in the market for electricity
swaptions. We show that our model outperforms the log-normal
benchmark in-sample and out-of-sample. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/3224650
- author
- Green, Rikard LU ; Larsson, Karl LU and Nossman, Marcus LU
- organization
- publishing date
- 2012
- type
- Working paper/Preprint
- publication status
- published
- subject
- in
- Journal of Energy Markets
- volume
- Forthcoming
- pages
- 26 pages
- publisher
- Incisive Media
- language
- English
- LU publication?
- yes
- id
- 63796935-dcdf-43d5-b3fb-ae2047adad68 (old id 3224650)
- date added to LUP
- 2016-04-04 10:30:06
- date last changed
- 2018-11-21 20:59:08
@misc{63796935-dcdf-43d5-b3fb-ae2047adad68,
abstract = {{This paper suggests a stochastic volatility<br/><br>
term-structure model applied to the pricing of electricity<br/><br>
swaptions in the Nord Pool market. The volatility structure in the<br/><br>
model is specified as a product of a time-dependent function that<br/><br>
handles the maturity effect, and a Cox-Ingersoll-Ross process that<br/><br>
captures the volatility smile. We employ a Fourier based approach<br/><br>
to price electricity swaptions and perform an empirical analysis<br/><br>
by calibrating the model to a data set consisting of more than<br/><br>
12000 implied volatilities corresponding to swaption prices from<br/><br>
the Nord Pool market. To our knowledge this is one of the first<br/><br>
studies of the volatility smile in the market for electricity<br/><br>
swaptions. We show that our model outperforms the log-normal<br/><br>
benchmark in-sample and out-of-sample.}},
author = {{Green, Rikard and Larsson, Karl and Nossman, Marcus}},
language = {{eng}},
note = {{Working Paper}},
publisher = {{Incisive Media}},
series = {{Journal of Energy Markets}},
title = {{Pricing Electricity Swaptions under a Stochastic Volatility Term-Structure Model}},
volume = {{Forthcoming}},
year = {{2012}},
}