Does the Black-Scholes formula work for electricity markets?
) (Department of Economics, School of Economics and Commercial Law, Göteborg University) Abstract Despite the high volatilities recorded for electricity prices, there seems to be little demand for options on electricity. One reason for the disinterest in electricity options could arise from uncertainty about how to price these options. This study uses recent econometric advances to nonparametrically estimate correct prices for electricity options and compare these to the Black-Scholes prices. The main finding is that although the nonparametric estimates deviate significantly from the Black-Scholes prices, it would be diffcult to find an alternative parametric model that performs better. Thus, from a practical viewpoint, the Black-Scholes prices appear to be the best available. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case
