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

Arbeitspapier

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

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Center for Mathematical Economics Working Papers ; No. 625

Classification and Topics

• Classification: Wirtschaft ; Estimation: General ; Semiparametric and Nonparametric Methods: General ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Energy: General ; Contingent Pricing; Futures Pricing; option pricing
• Subject: Volatility Smile ; Overlapping Delivery Periods ; Arbitrage ; AdditiveModels ; Power Options ; FFT

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Piccirilli, Marco ; Schmeck, Maren Diane ; Vargiolu, Tiziano
• Event: Veröffentlichung
• (who): Bielefeld University, Center for Mathematical Economics (IMW)
• (where): Bielefeld
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/227821
• URN: urn:nbn:de:0070-pub-29377564
• Last update: 10.03.2025, 11:42 AM CET