A numerical algorithm for pricing electricity derivatives for jump-diffusion processes based on continuous time lattices

作者：Albanese Claudio; Lo Harry; Tompaidis Stathis^*

来源：European Journal of Operational Research, 2012, 222(2): 361-368.

DOI：10.1016/j.ejor.2012.04.030

• Finance
• Dynamic programming
• Continuous time Markov chains
• Electricity derivatives

We present a numerical algorithm for pricing derivatives on electricity prices. The algorithm is based on approximating the generator of the underlying price process on a lattice of prices, resulting in an approximation of the stochastic process by a continuous time Markov chain. We numerically study the rate of convergence of the algorithm for the case of the Merton jump-diffusion model and apply the algorithm to calculate prices and sensitivities of both European and Bermudan electricity derivatives when the underlying price follows a stochastic process which exhibits both fast mean-reversion and jumps of large magnitude.

• 出版日期2012-10-16