A nonlinear diffusion model for electricity prices and derivatives Online publication date: Tue, 08-May-2018
by Zhigang Tong; Allen Liu
International Journal of Bonds and Derivatives (IJBD), Vol. 3, No. 4, 2017
Abstract: In this paper, we first develop a one-factor diffusion model for electricity prices, which is based on a power transformation of CIR process. We show that the new model is tractable and we are able to derive the analytical solutions for future and future option prices. To enhance the model's ability to capture the prices spikes, we extend it to a time-changed model where the price is modelled by a nonlinear CIR process time changed by Lévy subordinators. We employ the eigenfunction expansion methods to obtain the closed-form solutions for the derivatives. Our empirical study indicates the new models have the potential to capture the main features of electricity data better than the competing models.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Bonds and Derivatives (IJBD):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com