Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/227821
Year of Publication: 
2019
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 625
Publisher: 
Bielefeld University, Center for Mathematical Economics (IMW), Bielefeld
Abstract: 
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.
Subjects: 
Volatility Smile
Overlapping Delivery Periods
Arbitrage
AdditiveModels
Power Options
FFT
JEL: 
C13
C14
C32
Q40
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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