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Modeling Energy Spot Market and Pricing Energy Derivatives: A Technical Analysis

by Sheikh, Samir Masood

Abstract (Summary)
A data driven approach is utilized to model the energy spot prices using mean reverting diffusion processes with jumps. Initially, the Ornstein Uhlenbeck model is considered to calibrate the parameters using the data without incorporating jumps. After the calibration, a technical analysis of the jump magnitudes is carried out and accordingly a jump term, whose magnitudes are log-normally distributed with the rate of occurrence following a Poisson process, is incorporated into the model. Alternatively, some non-parametric statistics is also employed to analyze the jump process. Finally, an explicit closed-form equation for the price of a forward on energy spot prices is derived and prices are calculated numerically for different times to expiry.
Bibliographical Information:

Advisor:William Layton; John Chadam; Xinfu Chen

School:University of Pittsburgh

School Location:USA - Pennsylvania

Source Type:Master's Thesis

Keywords:mathematics

ISBN:

Date of Publication:06/28/2007

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