Capturing the power options smile by an additive two-factor model for\n overlapping futures prices

2019/10/02 by Marco Piccirilli, Piccirilli, Marco, Maren Diane Schmeck +3
Economics, Econometrics and Finance · #Capital Investment and Risk Analysis #FOS: Economics and business #Market Dynamics and Volatility #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.1910.01044

openalex publication_date 2019/10/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

In this paper we introduce an additive two-factor model for electricity\nfutures prices based on Normal Inverse Gaussian L 'evy processes, that fulfills\na no-overlapping-arbitrage (NOA) condition. We compute European option prices\nby Fourier transform methods, introduce a specific calibration procedure that\ntakes into account no-arbitrage constraints and fit the model to power option\nsettlement prices of the European Energy Exchange (EEX). We show that our model\nis able to reproduce the different levels and shapes of the implied volatility\n(IV) profiles displayed by options with a variety of delivery periods.\n

Related

• Pricing electricity derivatives within a Markov regime-switching model
• European Option Pricing of electricity under exponential functional of Lévy processes with Price-Cap principle
• An Ambit Field Framework for the Full Panel of Day-ahead Electricity Prices
• European Power Option Pricing with Extended Vasicěk Interest Rate and Exponential Ornstein-Uhlenbeck Asset Process under Different Market Assumptions
• The Variance Gamma++ Process and Applications to Energy Markets