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Fast Energy Derivative Pricing with Mean-Reverting Jump Diffusions

Article arXiv papers · Author: Nicola Cufaro Petroni et al.
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Summary

The paper presents simulation methods for energy spot prices modeled as the exponential of two independent components: a mean-reverting Ornstein–Uhlenbeck process and a pure jump process. The jump component follows a compound Poisson process with positive and negative exponentially distributed jump sizes, allowing the model to represent ordinary reversion alongside occasional price spikes.

The proposed methods are described as exact and computationally fast, and are applied to pricing Asian options, gas storage contracts, and swing options under different jump-diffusion specifications. The document emphasizes computational advantages but gives no numerical benchmarks, calibration details, or pricing comparisons in the supplied text. The model’s usefulness therefore depends on how well its assumptions fit the relevant energy market and on evidence beyond the summary provided.

Key ideas

  • The spot price is modeled as the exponential of mean-reverting and jump components.
  • The jump process is compound Poisson with bilateral exponential jump sizes.
  • The methods are applied to Asian options, gas storage, and swing contracts.
  • The document claims exact, fast simulation but supplies no benchmark results or calibration details.

Tags

CommoditiesMean reversionVolatilityDerivatives pricing
Full text
# Fast Pricing of Energy Derivatives with Mean-reverting Jump-diffusion Processes


# Fast Pricing of Energy Derivatives with Mean-reverting Jump-diffusion Processes









Most energy and commodity markets exhibit mean-reversion and occasional distinctive price spikes, which results in demand for derivative products which protect the holder against high prices. To this end, in this paper we present exact and fast methodologies for the simulation of the spot price dynamics modeled as the exponential of the sum of an Ornstein-Uhlenbeck and an independent pure jump process, where the latter one is driven by a compound Poisson process with (bilateral) exponentially distributed jumps. These methodologies are finally applied to the pricing of Asian options, gas storages and swings under different combinations of jump-diffusion market models, and the apparent computational advantages of the proposed procedures are emphasized.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.