A Dynamic Lévy Copula Model for the Spark Spread

Meyer-Brandis, Thilo and Morgan, Michael (2013): A Dynamic Lévy Copula Model for the Spark Spread. In: Benth, F.; Kholodnyi, V. and Laurence, P. (eds.) : Quantitative Energy Finance. New York: Springer. pp. 237-257

Abstract

We present a model for the spark spread on energy markets which is implied by a two-dimensional model for the electricity and gas spot prices. The marginal price processes are supposed to follow sums of (not necessarily Gaussian) Ornstein-Uhlenbeck components and the main focus of this paper is on the two-dimensional dependence modeling via Lévy copulas. We will introduce a specific class of skewed Lévy copulas and estimate the complete model on data from UK markets. Further, due to the arithmetic structure of the model, we are able to employ Fourier transform techniques to derive semi-analytic expressions for option prices.

• Item Type: Book Section
• Faculties: Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISBN: 978-1-4614-7247-6 ; 978-1-4614-7248-3
• Place of Publication: New York
• Language: English