Author(s)

Victor Alexander Okhuese^1*, Jane Akinyi Aduda², Joseph Mung’atu²

¹Department of Mathematics, Pan African University Institute for Basic Science Technology and Innovation, Nairobi, Kenya.
²College of Pure and Applied Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya.

In this study, we evaluate energy forward dynamics modeled as time-change Hilbert-space of linear functional. The energy forward is represented as an element of Hilbert-space of function. Representing energy forward and futures contracts as a time-changing stochastic process in a Hilbert-space of functions shows clearly, that an arbitrage-free forward price can be derived from the buy-and hold strategy in the energy market thereby enabling investors in the market willing to be salvage from the market uncertainties as well as Arrow-Debreu situations to execute a spot or forward contracts depending on the time and place the market becomes favorable. With a clock measuring speed of evolution or data frequency for the energy stock market, the distribution of the increments of the Lévy process with the subordinator is subordinated to the distribution of increments of the Lévy process and the results are utilized to price forward contracts of a sample electricity commodity.

Energy, Subordination, Hilbert-Space, Jump-Diffusion, Prices, Stochastic, Futures, Forwards, Contract, Volatility, Lévy Process

Okhuese, V. , Aduda, J. and Mung’atu, J. (2020) Evaluating Energy Forward Dynamics Modeled as a Subordinated Hilbert-Space Linear Functional. Journal of Mathematical Finance, 10, 412-430. doi: 10.4236/jmf.2020.103025.