On the Seasonality in the Implied Volatility of Electricity Options

The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets

“…Our framework allows for including typical features as the Samuelson effect, seasonalities, and stochastic volatility. In particular, we investigate the pricing procedures for electricity swaps and options in line with Arismendi et al ( 2016), Schneider andTavin (2018), andFanelli andSchmeck (2019). A numerical study highlights the differences between these models depending on the delivery period.…”

“…Due to the non-storability of electricity, the underlying is typically delivered over a period, and the contract is therefore referred to as a swap. In electricity markets, the delivery period has an influence on price dynamics, and Fanelli and Schmeck (2019) have provided empirical evidence indicating that implied volatilities of electricity options are seasonal with respect to the delivery period. In other words, the distributional features -or the pricing measure -depend on the delivery period of the contract.…”

“…At present, there is a growing worldwide trend to acknowledge the need for sustainable energy production, which also raises the expectations of a further increasing impact of seasonal effect. Among others, Arismendi et al (2016), Borovkova and Schmeck (2017), and Fanelli and Schmeck (2019) have addressed and modeled seasonality in either commodity-or energy markets. Typically, a deterministic seasonal price level is added to the price dynamics, but the dynamics can also exhibit seasonal behavior.…”

“…Typically, a deterministic seasonal price level is added to the price dynamics, but the dynamics can also exhibit seasonal behavior. Fanelli and Schmeck (2019) distinguish between seasonalities in the trading day and seasonalities in the delivery period. Arismendi et al (2016) suggest the use of a seasonal stochastic volatility model for commodity futures.…”

Fast calibration of two‐factor models for energy option pricing

“…It is known that the geometric Brownian motion adopted in the Black formula does not capture fundamental features of energy commodities. A number of diffusion processes specific to energy assets were then proposed 4‐7 and, for their flexibility, multifactor models became a popular choice 8,9 …”