Stochastic volatility for the forward price dynamics

Fred Espen Benth (University of Oslo)

with Barbara Ruediger (Uni Wuppertal), Andre Suess (Zurich)

The forward price dynamics in commodity and energy markets are conveniently formulated as a stochastic process taking values in a function space. In this infinite dimensional context, we propose a stochastic volatility model being an extension of the Barndorff-Nielsen & Shephard model. This leads us to a study of Ornstein-Uhlenbeck processes in Hilbert space, where we anaylse the characteristic function and other probabilistic properties. Finally, we relate our analysis to random fields. Some empirical evidence from the power market is provided.