Pricing electricity derivatives under alternative stochastic spot price models

Abstract

The article proposes several mean-reversion jump-diffusion models to describe spot prices of electricity. It incorporates multiple jumps, regime-switching and stochastic volatility into these models in order to capture the salient features of electricity prices due to the physical characteristics of electricity. Prices of various electricity derivatives are derived under each model using the Fourier transform methods. The implications of modeling assumptions to electricity derivative pricing are also examined.