Analysing common processes used to model energy prices

Choosing the appropriate process for modelling energy prices is essential for best calculating value, risk and hedging metrics for energy derivatives and assets. In this first article of a six-part series, Carlos Blanco and Michael Pierce discuss some common price processes used to model energy prices

The choice of which price process to use when modelling energy prices is crucial to assessing the valuation, risk calculation and hedge parameters for energy derivatives and physical assets. Yet energy spot prices are particularly difficult to model compared with other financial asset prices such as equities, interest rates or currencies. Before introducing the most common stochastic price processes used to model energy prices, it is important to understand some of the main dynamics that drive