6533b827fe1ef96bd12863b8
RESEARCH PRODUCT
Dynamic copula models for the spark spread
Paul C. KettlerFred Espen Benthsubject
Statistics::TheoryMathematical financeCopula (linguistics)Statistics::Other StatisticsBivariate analysisLévy processStatistics::ComputationInverse Gaussian distributionsymbols.namesakeAutoregressive modelSpark spreadStatisticsEconometricssymbolsEconomicsStatistics::MethodologyMarginal distributionGeneral Economics Econometrics and FinanceFinancedescription
We propose a non-symmetric copula to model the evolution of electricity and gas prices by a bivariate non-Gaussian autoregressive process. We identify the marginal dynamics as driven by normal inverse Gaussian processes, estimating them from a series of observed UK electricity and gas spot data. We estimate the copula by modeling the difference between the empirical copula and the independent copula. We then simulate the joint process and price options written on the spark spread. We find that option prices are significantly influenced by the copula and the marginal distributions, along with the seasonality of the underlying prices.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2011-03-01 | Quantitative Finance |