Department of Economics and Business Economics

Approximating Lévy semistationary processes via Fourier methods in the context of power markets

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The present paper discusses simulation of Lévy semistationary (LSS) processes in the context of power markets. A disadvantage of applying numerical integration to obtain trajectories of LSS processes is that such a scheme is not iterative. We address this problem by introducing and analyzing a Fourier simulation scheme for obtaining trajectories of these processes in an iterative manner. Furthermore, we demonstrate that our proposed scheme is well suited for simulation of a wide range of LSS processes, including, in particular, LSS processes indexed by a kernel function which is steep close to the origin. Finally, we put our simulation scheme to work for simulating the price of path-dependent options to demonstrate the advantages of the proposed Fourier simulation scheme.

Original languageEnglish
JournalS I A M Journal on Financial Mathematics
Pages (from-to)71-98
Number of pages28
Publication statusPublished - 1 Jan 2014

    Research areas

  • Fourier inversion, Lévy semistationary processes, Numerical simulation, Path-dependent options, Spot modeling

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