Kiesel, Rüdiger; Schindlmayr, Gero; Börger, Reik:

A two-factor model for the electricity forward market

In: Quantitative finance, Jg. 9 (2009) ; Nr. 3, S. 279-287
ISSN: 1469-7696
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Fakultät für Wirtschaftswissenschaften
Abstract:
This paper provides a two-factor model for electricity futures, which captures the main features of the market and fits the term structure of volatility. The approach extends the one-factor-model of Clewlow and Strickland to a two-factor model and modifies it to make it applicable to the electricity market. We will especially take care of the existence of delivery periods in the underlying futures. Additionally, the model is calibrated to options on electricity futures and its performance for practical application is discussed.