Saved in:
| Main Authors: | , |
|---|---|
| Format: | Preprint |
| Published: |
2025
|
| Subjects: | |
| Online Access: | https://arxiv.org/abs/2507.11480 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1866908849188896768 |
|---|---|
| author | Leung, Tim Lu, Kevin W. |
| author_facet | Leung, Tim Lu, Kevin W. |
| contents | We consider the pricing of energy spread options for spot prices following an exponential Ornstein-Uhlenbeck process driven by a sum of independent multivariate variance gamma processes, which gives rise to mean-reverting, infinite activity price dynamics. Within this class of driving processes, the Esscher transform is used to obtain an equivalent martingale measure with a focus on the weak variance alpha-gamma process. By deriving an analytical formula for the cumulant generating function of the innovation term, we obtain a pricing formula for forwards and apply the FFT method of Hurd and Zhou to price spread options. Lastly, we demonstrate how the model should be both estimated on energy prices under the real world measure and calibrated on forward or call prices, and provide numerical results for the pricing of spread options. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2507_11480 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Pricing energy spread options with variance gamma-driven Ornstein-Uhlenbeck dynamics Leung, Tim Lu, Kevin W. Mathematical Finance We consider the pricing of energy spread options for spot prices following an exponential Ornstein-Uhlenbeck process driven by a sum of independent multivariate variance gamma processes, which gives rise to mean-reverting, infinite activity price dynamics. Within this class of driving processes, the Esscher transform is used to obtain an equivalent martingale measure with a focus on the weak variance alpha-gamma process. By deriving an analytical formula for the cumulant generating function of the innovation term, we obtain a pricing formula for forwards and apply the FFT method of Hurd and Zhou to price spread options. Lastly, we demonstrate how the model should be both estimated on energy prices under the real world measure and calibrated on forward or call prices, and provide numerical results for the pricing of spread options. |
| title | Pricing energy spread options with variance gamma-driven Ornstein-Uhlenbeck dynamics |
| topic | Mathematical Finance |
| url | https://arxiv.org/abs/2507.11480 |