On the analysis of risk premiums in power markets using the Barndorff-Nielsen and Shephard model with leverage

Abstract

This thesis is devoted to the study of risk premiums in power markets using the Ornstein- Uhlenbeck process with Barndorff-Nielsen and Shephard stochastic volatility with leverage. Forwards were priced using a class of measures that simultaneously allow for change of level and speed in the mean reversion popularized by Benth and Ortiz-Latorre. The change of measure enables the study of the behaviour of the risk premium under specific conditions. The forward prices and risk premiums were computed for the arithmetic and geometric price models. An analysis of the risk premium for the arithmetic model was conducted yielding shapes which are typically observed on energy markets. For the geometric spot price model the risk premium contained an expectation which does not allow for thorough analysis of the risk premium. An affine transform was performed yielding a system of Riccati Ordinary Differential Equations.