Bernoulli

  • Bernoulli
  • Volume 19, Number 3 (2013), 803-845.

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

Ole E. Barndorff-Nielsen, Fred Espen Benth, and Almut E. D. Veraart

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Abstract

This paper introduces the class of volatility modulated Lévy-driven Volterra ($\mathcal{VMLV}$) processes and their important subclass of Lévy semistationary ($\mathcal{LSS}$) 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 $\mathcal{VMLV}$ 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.

Article information

Source
Bernoulli, Volume 19, Number 3 (2013), 803-845.

Dates
First available in Project Euclid: 26 June 2013

Permanent link to this document
https://projecteuclid.org/euclid.bj/1372251144

Digital Object Identifier
doi:10.3150/12-BEJ476

Mathematical Reviews number (MathSciNet)
MR3079297

Zentralblatt MATH identifier
1337.60088

Keywords
energy markets forward price generalised hyperbolic distribution Lévy semistationary process Samuelson effect spot price stochastic integration stochastic volatility volatility modulated Lévy-driven Volterra process

Citation

Barndorff-Nielsen, Ole E.; Benth, Fred Espen; Veraart, Almut E. D. Modelling energy spot prices by volatility modulated Lévy-driven Volterra processes. Bernoulli 19 (2013), no. 3, 803--845. doi:10.3150/12-BEJ476. https://projecteuclid.org/euclid.bj/1372251144


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