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Cross-Commodity Spot Price Modeling with Stochastic Volatility and Leverage For Energy Markets

Part of: Stochastic analysis Mathematical finance Stochastic processes Basic linear algebra

Published online by Cambridge University Press:  22 February 2016

F. E. Benth  and
L. Vos
F. E. Benth*
Affiliation:
University of Oslo
L. Vos*
Affiliation:
University of Oslo and University of Agder
*
∗ Postal address: Centre of Mathematics for Applications, University of Oslo, PO Box 1053, Blindern, N-0316 Oslo, Norway.
∗ Postal address: Centre of Mathematics for Applications, University of Oslo, PO Box 1053, Blindern, N-0316 Oslo, Norway.
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Abstract

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Spot prices in energy markets exhibit special features, such as price spikes, mean reversion, stochastic volatility, inverse leverage effect, and dependencies between the commodities. In this paper a multivariate stochastic volatility model is introduced which captures these features. The second-order structure and stationarity of the model are analyzed in detail. A simulation method for Monte Carlo generation of price paths is introduced and a numerical example is presented.

Keywords

Energy marketOrnstein-Uhlenbeck processstochastic volatilityleveragesubordinator

MSC classification

Primary: 60G10: Stationary processes
Secondary: 91G20: Derivative securities 15A04: Linear transformations, semilinear transformations 60G51: Processes with independent increments; L'evy processes 60H30: Applications of stochastic analysis (to PDE, etc.) 91G60: Numerical methods (including Monte Carlo methods)

Information

Type
General Applied Probability
Information
Advances in Applied Probability , Volume 45 , Issue 2 , June 2013 , pp. 545 - 571
Copyright
© Applied Probability Trust 

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