A Lattice-Based Method for Pricing Electricity Derivatives Under the Threshold Model

摘要

Of the several models introduced for the modelling of electricity prices, the oneproposed by Geman and Roncoroni, that we will refer to as the 'threshold model', has exhibitedsignificant success in both its statistical properties and ability to accurately replicate trajectoriesof electricity prices. This article presents a lattice-based method for the discretization of thethreshold model that allows for the pricing of derivatives, including swing options. Themethodology builds on an idea presented by Bally et al. for discretizing density functions, andconstructs an approximating process that is shown to be a good proxy of the original process,producing a grid that incorporates both mean reversion and jumps.