Advanced

Pricing Electricity Swaptions under a Stochastic Volatility Term-Structure Model

Green, Rikard LU ; Larsson, Karl LU and Nossman, Marcus LU (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:
author
organization
publishing date
type
Working Paper
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
2012-12-06 08:09:26
date last changed
2016-10-07 15:17:06
@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},
  pages        = {26},
  publisher    = {ARRAY(0x6592ea8)},
  series       = {Journal of Energy Markets},
  title        = {Pricing Electricity Swaptions under a Stochastic Volatility Term-Structure Model},
  volume       = {Forthcoming},
  year         = {2012},
}