The Normal Inverse Gaussian Distribution and Spot Price Modelling in Energy Markets
Year: 2004
Type: article
Abstract: We model spot prices in energy markets with exponential non-Gaussian Ornstein–Uhlenbeck processes. We generalize the classical geometric Brownian motion and Schwartz' mean-reversion model by introducing Lévy processes as the driving noise rather than Brownian motion. Instead of modelling the spot price dynamics as the solution of a stochastic differential equation with jumps, it is advantageous from a statistical point of view to model the price process directly. Imposing the normal inverse Gaussian distribution as the statistical model for the Lévy increments, we obtain a superior fit compared to the Gaussian model when applied to spot price data from the oil and gas markets. We also discuss the problem of pricing forwards and options and outline how to find the market price of risk in an incomplete market.
Authors: FRED ESPEN BENTH, JŪRATĖ ŠALTYTĖ-BENTH
Institutions: University of Oslo, University of Agder, Klaipėda University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: Norges Forskningsråd
OpenAlex ID: W2164378403