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Pricing of Forwards and Options in a Multivariate Non-Gaussian Stochastic Volatility Model for Energy Markets

Part of: Basic linear algebra Stochastic processes Stochastic analysis Mathematical finance

Published online by Cambridge University Press:  22 February 2016

F. E. Benth  and
L. Vos
F. E. Benth*
Affiliation:
University of Oslo
L. Vos*
Affiliation:
University of Oslo and University of Agder
*
∗ Postal address: Centre of Mathematics for Applications, University of Oslo, PO Box 1053, Blindern, N-0316 Oslo, Norway.
∗ Postal address: Centre of Mathematics for Applications, University of Oslo, PO Box 1053, Blindern, N-0316 Oslo, Norway.
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Abstract

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In Benth and Vos (2013) we introduced a multivariate spot price model with stochastic volatility for energy markets which captures characteristic features, such as price spikes, mean reversion, stochastic volatility, and inverse leverage effect as well as dependencies between commodities. In this paper we derive the forward price dynamics based on our multivariate spot price model, providing a very flexible structure for the forward curves, including contango, backwardation, and hump shape. Moreover, a Fourier transform-based method to price options on the forward is described.

Keywords

Energy marketforward pricingspread optionsubordinatorstochastic volatility

MSC classification

Primary: 60G10: Stationary processes
Secondary: 91G20: Derivative securities 15A04: Linear transformations, semilinear transformations 60G51: Processes with independent increments; L'evy processes 60H30: Applications of stochastic analysis (to PDE, etc.)
Type
General Applied Probability
Information
Advances in Applied Probability , Volume 45 , Issue 2 , June 2013 , pp. 572 - 594
Copyright
© Applied Probability Trust 

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