A non-Gaussian Ornstein-Uhlenbeck model for pricing wind power futures

Fred Espen Benth, Anca Pircalabu

Research output: Contribution to journalJournal articleResearchpeer-review

6 Citations (Scopus)

Abstract

The recent introduction of wind power futures written on the German wind power production index has brought with it new interesting challenges in terms of modelling and pricing. Some particularities of this product are the strong seasonal component embedded in the underlying, the fact that the wind index is bounded from both above and below and also that the futures are settled against a synthetically generated spot index. Here, we consider the non-Gaussian Ornstein–Uhlenbeck type processes proposed by Barndorff-Nielsen and Shephard in the context of modelling the wind power production index. We discuss the properties of the model and estimation of the model parameters. Further, the model allows for an analytical formula for pricing wind power futures. We provide an empirical study, where the model is calibrated to 37 years of German wind power production index that is synthetically generated assuming a constant level of installed capacity. Also, based on 1 year of observed prices for wind power futures with different delivery periods, we study the market price of risk. Generally, we find a negative risk premium whose magnitude decreases as the length of the delivery period increases. To further demonstrate the benefits of our proposed model, we address the pricing of European options written on wind power futures, which can be achieved through Fourier techniques.
Original languageEnglish
JournalApplied Mathematical Finance
Volume25
Issue number1
Pages (from-to)26-65
Number of pages30
ISSN1350-486X
DOIs
Publication statusPublished - 2018

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Wind Power
Wind power
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Keywords

  • Wind power futures
  • Weather derivatives
  • Ornstein-Uhlenbeck process
  • Market price of risk

Cite this

Benth, Fred Espen ; Pircalabu, Anca. / A non-Gaussian Ornstein-Uhlenbeck model for pricing wind power futures. In: Applied Mathematical Finance. 2018 ; Vol. 25, No. 1. pp. 26-65.
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A non-Gaussian Ornstein-Uhlenbeck model for pricing wind power futures. / Benth, Fred Espen; Pircalabu, Anca.

In: Applied Mathematical Finance, Vol. 25, No. 1, 2018, p. 26-65.

Research output: Contribution to journalJournal articleResearchpeer-review

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