Evaluation of energy forward curves with jumps under the general Levy process

Victor Alexander Okhuese, Jane Akinyi Aduda, Joseph Mung’atu

Abstract


In this study, we evaluate the relationship between the forward rates and the future delivery period with the consideration of the Levy process for a time-inhomogeneous exponential jump-diffusion process and model the forward curve. This is a large variety of stylized features observed in the Samuelson effect of increasing volatilities close to maturity. However, a new method based on characteristic functions is used to estimate the jump component in a finite-activity Levy process, which includes the jump frequency and the jump size distribution which enables ´ the further investigation of the properties of estimators without the presence of high frequency data ∆. Numerical implementation of the approach was applied on sample electricity data of about 10,000 observations between the period of 2 years and then a seasonalized forecast for an extra year was implemented to normalize the volatility in forwards contracts.

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Published: 2020-06-23

How to Cite this Article:

Victor Alexander Okhuese, Jane Akinyi Aduda, Joseph Mung’atu, Evaluation of energy forward curves with jumps under the general Levy process, Math. Finance Lett., 2020 (2020), Article ID 3

Copyright © 2020 Victor Alexander Okhuese, Jane Akinyi Aduda, Joseph Mung’atu. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Mathematical Finance Letters

ISSN 2051-2929

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