A Structural Model for Electricity Forward Prices

Item Type Monograph (Working Paper)
Abstract

Structural models for forward electricity prices are of great relevance nowadays, given the major structural changes in the market due to the increase of renewable energy in the production mix. In this study, we derive a spatio-temporal dynamical model based on the Heath-Jarrow-Morton (HJM) approach under the Musiela parametrization, which ensures an arbitrage-free model for electricity Forward prices. The model is fitted to a unique data set of historical price Forward curves. As a particular feature of the model, we disentangle the temporal from spatial (maturity) effects on the dynamics of forward prices, and shed light on the statistical properties of risk premia, of the noise volatility term structure and of the spatio-temporal noise correlation structures. We find that the short-term risk premia oscillates around zero, but becomes negative in the long run. We identify the Samuelson effect in the volatility term structure and volatility bumps, explained by market fundamentals. Furthermore we find evidence for coloured noise and correlated residuals, which we model by a Hilbert space-valued normal inverse Gaussian Lévy process with a suitable covariance functional.

Authors Paraschiv, Florentina & Benth, Fred Espen
Language English
Subjects finance
HSG Classification contribution to scientific community
Date 23 May 2016
Publisher SoF - HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Number 2016/11
Number of Pages 45
Official URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id...
Contact Email Address florentina.paraschiv@unisg.ch
Depositing User Geraldine Frei-Böbel
Date Deposited 24 May 2016 06:21
Last Modified 07 Jul 2020 00:23
URI: https://www.alexandria.unisg.ch/publications/248403

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Citation

Paraschiv, Florentina & Benth, Fred Espen: A Structural Model for Electricity Forward Prices. School of Finance Working Paper Series, 2016, 2016/11.

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https://www.alexandria.unisg.ch/id/eprint/248403
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