Abstract
This paper suggests a stochastic volatility term-structure model applied to the pricing of electricity swaptions in the Nordic power market traded at the Nasdaq OMX Commodities exchange. The volatility structure in the model is specified as a product of a time-dependent function that handles the maturity effect, and a Cox-Ingersoll-Ross process for the stochastic volatility. We employ a Fourier based approach to price electricity swaptions and perform an empirical analysis by calibrating the model to a data set consisting of more than 12000 pairs of implied bid-ask volatilities corresponding to swaption prices from the Nordic power market. We show that our model outperforms the log-normal benchmark both in-sample and out-of-sample
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
