Gas Storage Valuation Under Lévy Processes Using the Fast Fourier Transform
In this paper we study the modeling and computational bene fits of using Lévy processes and the Fast Fourier Transform (FFT) in the valuation of gas storage assets and, from a practitioners perspective, in creating market consistent valuations and hedging portfolios. The valuation methodology derives the asset value via stochastic backwards dynamic programming, where we use an alternative formulation of the methodology proposed by Jaimungal and Surkov [2011]. The use of the FFT algorithm opens up a wide range of potential spot price models. We compare one such model, the Mean Reverting Variance Gamma process, to a simple Mean Reverting Diff usion and demonstrate it's superiority in replicating the shape of the market implied volatility surface. We derive a transform based swaption formula in order to calibrate our models to market traded options, and use these calibrated models to then value a stylized storage asset and calculate the hedging positions needed to monetize this value. We demonstrate how one can incorporate one's view on the shape of the implied volatility surface in the valuation of the asset by investigating the e ffect of changes in the volatility surface on the asset value. Convergence results for the valuation algorithm under both models are presented, along with a discussion around the potential for increasing further the computational efficiency of the algorithm
Year of publication: |
2015
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Authors: | Kiely, Greg |
Other Persons: | Murphy, Bernard (contributor) ; Cummins, Mark (contributor) |
Publisher: |
[2015]: [S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (49 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 4, 2015 erstellt |
Other identifiers: | 10.2139/ssrn.2561864 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10013028598
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