Abstract: German electricity European options on futures using
Lévy processes for the underlying asset are examined. Implied
volatility evolution, under each of the considered models, is
discussed after calibrating for the Merton jump diffusion (MJD),
variance gamma (VG), normal inverse Gaussian (NIG), Carr, Geman,
Madan and Yor (CGMY) and the Black and Scholes (B&S) model.
Implied volatility is examined for the entire sample period, revealing
some curious features about market evolution, where data fitting
performances of the five models are compared. It is shown that
variance gamma processes provide relatively better results and that
implied volatility shows significant differences through time, having
increasingly evolved. Volatility changes for changed uncertainty, or
else, increasing futures prices and there is evidence for the need to
account for seasonality when modelling both electricity spot/futures
prices and volatility.