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The Non-Markovian Approach to the Valuation and Hedging of European Contingent Claims on Power with Spikes of Pareto Distributed Magnitude
by
Valery A. Kholodnyi
Platts Analytics
We present and further develop a new approach to modeling power prices with spikes proposed earlier by the author. In contrast to other approaches, we model power prices with spikes as a non-Markovian stochastic process that allows for modeling spikes directly as self-reversing jumps. We show how this approach can be used to value European contingent claims on power with spikes as well as to value and dynamically hedge European contingent claims on forwards on power with spikes in a practically important special case of the Pareto distribution for the magnitude of spikes.
Date received: February 12, 2008
Copyright © 2008 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # caws-17.