6533b833fe1ef96bd129b850

RESEARCH PRODUCT

Pricing of Forwards and Options in a Multivariate Non-Gaussian Stochastic Volatility Model for Energy Markets

L. VosFred Espen Benth

subject

TheoryofComputation_MISCELLANEOUSspread optionStatistics and Probability15A04Computer Science::Computer Science and Game TheoryFinancial economicsNormal backwardationImplied volatility01 natural sciences010104 statistics & probabilityEnergy marketVolatility swap0502 economics and businessEconometricsForward volatilitystochastic volatility0101 mathematicsMathematics050208 financeStochastic volatilityApplied Mathematics05 social sciencesContangosubordinatorforward pricing91G20Forward priceVolatility smile60H3060G1060G51

description

In Benth and Vos (2013) we introduced a multivariate spot price model with stochastic volatility for energy markets which captures characteristic features, such as price spikes, mean reversion, stochastic volatility, and inverse leverage effect as well as dependencies between commodities. In this paper we derive the forward price dynamics based on our multivariate spot price model, providing a very flexible structure for the forward curves, including contango, backwardation, and hump shape. Moreover, a Fourier transform-based method to price options on the forward is described.

yearjournalcountryeditionlanguage
2013-06-01Advances in Applied Probability
https://doi.org/10.1017/s0001867800006443