Modelling energy spot prices by volatility modulated Levy-driven Volterra processes

This paper introduces the class of volatility modulated L\'{e}vy-driven Volterra (VMLV) processes and their important subclass of L\'{e}vy semistationary (LSS) processes as a new framework for modelling energy spot prices. The main modelling idea consists of four principles: First, deseasonalised spot prices can be modelled directly in stationarity. Second, stochastic volatility is regarded as a key factor for modelling energy spot prices. Third, the model allows for the possibility of jumps and extreme spikes and, lastly, it features great flexibility in terms of modelling the autocorrelation structure and the Samuelson effect. We provide a detailed analysis of the probabilistic properties of VMLV processes and show how they can capture many stylised facts of energy markets. Further, we derive forward prices based on our new spot price models and discuss option pricing. An empirical example based on electricity spot prices from the European Energy Exchange confirms the practical relevance of our new modelling framework.Comment: Published in at http://dx.doi.org/10.3150/12-BEJ476 the Bernoulli (http://isi.cbs.nl/bernoulli/) by the International Statistical Institute/Bernoulli Society (http://isi.cbs.nl/BS/bshome.htm

The valuation of clean spread options: linking electricity, emissions and fuels

The purpose of the paper is to present a new pricing method for clean spread options, and to illustrate its main features on a set of numerical examples produced by a dedicated computer code. The novelty of the approach is embedded in the use of a structural model as opposed to reduced-form models which fail to capture properly the fundamental dependencies between the economic factors entering the production process

Large-scale unit commitment under uncertainty: an updated literature survey

The Unit Commitment problem in energy management aims at finding the optimal production schedule of a set of generation units, while meeting various system-wide constraints. It has always been a large-scale, non-convex, difficult problem, especially in view of the fact that, due to operational requirements, it has to be solved in an unreasonably small time for its size. Recently, growing renewable energy shares have strongly increased the level of uncertainty in the system, making the (ideal) Unit Commitment model a large-scale, non-convex and uncertain (stochastic, robust, chance-constrained) program. We provide a survey of the literature on methods for the Uncertain Unit Commitment problem, in all its variants. We start with a review of the main contributions on solution methods for the deterministic versions of the problem, focussing on those based on mathematical programming techniques that are more relevant for the uncertain versions of the problem. We then present and categorize the approaches to the latter, while providing entry points to the relevant literature on optimization under uncertainty. This is an updated version of the paper "Large-scale Unit Commitment under uncertainty: a literature survey" that appeared in 4OR 13(2), 115--171 (2015); this version has over 170 more citations, most of which appeared in the last three years, proving how fast the literature on uncertain Unit Commitment evolves, and therefore the interest in this subject

A weak law of large numbers for realised covariation in a Hilbert space setting

This article generalises the concept of realised covariation to Hilbert-space-valued stochastic processes. More precisely, based on high-frequency functional data, we construct an estimator of the trace-class operator-valued integrated volatility process arising in general mild solutions of Hilbert space-valued stochastic evolution equations in the sense of Da Prato and Zabczyk (2014). We prove a weak law of large numbers for this estimator, where the convergence is uniform on compacts in probability with respect to the Hilbert–Schmidt norm. In addition, we determine convergence rates for common stochastic volatility models in Hilbert spaces

Pricing Futures and Options in Electricity Markets

In this paper we derive power futures prices from a two-factor spot model being a generalization of the classical Schwartz–Smith commodity dynamics. We include non-Gaussian effects by introducing Lévy processes as the stochastic drivers, and estimate the model to data observed at the European Electricity Exchange in Germany. The spot and futures price models are fitted jointly, including the market price of risk parameterized from an Esscher transform. We apply this model to price call and put options on power futures. It is argued theoretically that the pricing measure for options may be different to the pricing measure of futures from spot in power markets due to the non-storability of the electricity spot. Empirical evidence pointing to this fact is found from option prices observed at the European Electricity Exchange. The definitive version is available at springerlink.co