Pricing electricity derivatives within a Markov regime-switching model: a risk premium approach

• Published in: Mathematical methods of operations research (Heidelberg, Germany) Vol. 79; no. 1; pp. 1 - 30
• Main Author: Janczura, Joanna
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.02.2014; Springer Nature B.V
• Subjects: Business and Management; Calculus of Variations and Optimal Control; Optimization; Calibration; Commodities; Data analysis; Derivatives; Economic models; Economic statistics; Economic theory; Electricity; Electricity generation; Energy economics; Markov models; Mathematical analysis; Mathematical models; Mathematics; Mathematics and Statistics; Operations research; Operations Research/Decision Theory; Options markets; Original Article; Pricing; Pricing policies; Risk; Risk premiums; Studies; Time series; Risk premium; Electricity spot price; Regime-switching model; Derivatives pricing

In this paper we derive analytic formulas for electricity derivatives under assumption that electricity spot prices follow a 3-regime Markov regime-switching model with independent spikes and drops and periodic transition matrix. Since the classical derivatives pricing methodology cannot be used in...