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A Lattice‐Based Method for Pricing Electricity Derivatives Under the Threshold Model

A Lattice‐Based Method for Pricing Electricity Derivatives Under the Threshold Model Of the several models introduced for the modelling of electricity prices, the one proposed by Geman and Roncoroni, that we will refer to as the ‘threshold model’, has exhibited significant success in both its statistical properties and ability to accurately replicate trajectories of electricity prices. This article presents a lattice‐based method for the discretization of the threshold model that allows for the pricing of derivatives, including swing options. The methodology builds on an idea presented by Bally et al. for discretizing density functions, and constructs an approximating process that is shown to be a good proxy of the original process, producing a grid that incorporates both mean reversion and jumps. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

A Lattice‐Based Method for Pricing Electricity Derivatives Under the Threshold Model

37 pages

A Lattice‐Based Method for Pricing Electricity Derivatives Under the Threshold Model

Abstract

Of the several models introduced for the modelling of electricity prices, the one proposed by Geman and Roncoroni, that we will refer to as the ‘threshold model’, has exhibited significant success in both its statistical properties and ability to accurately replicate trajectories of electricity prices. This article presents a lattice‐based method for the discretization of the threshold model that allows for the pricing of derivatives, including swing options. The...
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Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/13504860802379835
Publisher site
See Article on Publisher Site

Abstract

Of the several models introduced for the modelling of electricity prices, the one proposed by Geman and Roncoroni, that we will refer to as the ‘threshold model’, has exhibited significant success in both its statistical properties and ability to accurately replicate trajectories of electricity prices. This article presents a lattice‐based method for the discretization of the threshold model that allows for the pricing of derivatives, including swing options. The methodology builds on an idea presented by Bally et al. for discretizing density functions, and constructs an approximating process that is shown to be a good proxy of the original process, producing a grid that incorporates both mean reversion and jumps.

Journal

Applied Mathematical FinanceTaylor & Francis

Published: Dec 1, 2008

Keywords: Electricity spot prices; threshold model; lattice‐based jump representation

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