Electricity Derivatives Pricing with Forward-Looking Information

Item Type Journal paper
Abstract

In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We employ a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the general importance of forward-looking information for electricity derivatives pricing. However, we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity, whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead.

Authors Füss, Roland; Mahringer, Steffen & Prokopczuk, Marcel
Journal or Publication Title Journal of Economic Dynamics and Control
Language English
Keywords Electricity Futures, Fundamental Model, Derivatives Pricing, Forward-looking Information, Enlargement of Filtrations
Subjects business studies
Institute/School SEW - Swiss Institute for Empirical Economic Research
s/bf - Swiss Institute of Banking and Finance
HSG Classification contribution to scientific community
Refereed Yes
Date 1 September 2015
Publisher Elsevier
Place of Publication Amsterdam
Volume 58
Number September
Page Range 34-57
Number of Pages 24
ISSN 0165-1889
ISSN-Digital 1879-1743
Publisher DOI 10.1016/j.jedc.2015.05.016
Depositing User Prof. Dr. Roland Füss
Date Deposited 30 Sep 2013 14:12
Last Modified 04 Apr 2017 09:27
URI: https://www.alexandria.unisg.ch/publications/225969

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Citation

Füss, Roland; Mahringer, Steffen & Prokopczuk, Marcel (2015) Electricity Derivatives Pricing with Forward-Looking Information. Journal of Economic Dynamics and Control, 58 (September). 34-57. ISSN 0165-1889

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https://www.alexandria.unisg.ch/id/eprint/225969
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