Abstract
We propose a joint modeling of spot electricity prices, forwards prices and other derivative prices, using recent developments in discrete time asset pricing methods based on the notions of stochastic discount factor and of Compound Autoregressive (or affine) stochastic processes. We show that this approach provides quasi explicit formulae for forward and option prices, while allowing for a large flexibility in the modeling of dynamics, spikes and seasonality, both in the historical and the risk neutral worlds. We also propose a variety of inference techniques involving inversion methods, the Kalman filter and the Kitagawa–Hamilton filter. Finally, an application based on French spot prices and forward products is proposed.
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Monfort, A., Féron, O. Joint econometric modeling of spot electricity prices, forwards and options. Rev Deriv Res 15, 217–256 (2012). https://doi.org/10.1007/s11147-012-9075-z
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DOI: https://doi.org/10.1007/s11147-012-9075-z