Dynamic copula models for the spark spread |
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Authors: | Fred Espen Benth |
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Institution: | 1. Centre of Mathematics for Applications, Department of Mathematics , University of Oslo , P.O. Box 1053, Blindern, N–0316 Oslo, Norway;2. University of Agder, School of Management , Serviceboks 422, N-4604 Kristiansand, Norway |
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Abstract: | We propose a non-symmetric copula to model the evolution of electricity and gas prices by a bivariate non-Gaussian autoregressive process. We identify the marginal dynamics as driven by normal inverse Gaussian processes, estimating them from a series of observed UK electricity and gas spot data. We estimate the copula by modeling the difference between the empirical copula and the independent copula. We then simulate the joint process and price options written on the spark spread. We find that option prices are significantly influenced by the copula and the marginal distributions, along with the seasonality of the underlying prices. |
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Keywords: | Mathematical finance Copulas Derivative pricing models Asymmetry Empirical time series analysis Energy derivatives Levy process Numerical simulation |
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