11,695 research outputs found
Spot price modeling and the valuation of electricity forward contracts : the role of demand and capacity.
We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premiumPower prices; Demand; Capacity; Forward premium; Forward bias; Market price of capacity risk; Market price of demand risk; PJM; England and Wales; Nord pool;
Utility indifference pricing and hedging for structured contracts in energy markets
In this paper we study the pricing and hedging of structured products in
energy markets, such as swing and virtual gas storage, using the exponential
utility indifference pricing approach in a general incomplete multivariate
market model driven by finitely many stochastic factors. The buyer of such
contracts is allowed to trade in the forward market in order to hedge the risk
of his position. We fully characterize the buyer's utility indifference price
of a given product in terms of continuous viscosity solutions of suitable
nonlinear PDEs. This gives a way to identify reasonable candidates for the
optimal exercise strategy for the structured product as well as for the
corresponding hedging strategy. Moreover, in a model with two correlated
assets, one traded and one nontraded, we obtain a representation of the price
as the value function of an auxiliary simpler optimization problem under a risk
neutral probability, that can be viewed as a perturbation of the minimal
entropy martingale measure. Finally, numerical results are provided.Comment: 32 pages, 5 figure
Determinants of power spreads in electricity futures markets: A multinational analysis. ESRI WP580, December 2017
The growth in variable renewable energy (vRES) and the need for flexibility in power
systems go hand in hand. We study how vRES and other factors, namely the price of substitute
fuels, power price volatility, structural breaks, and seasonality impact the hedgeable power
spreads (profit margins) of the main dispatchable flexibility providers in the current power
systems - gas and coal power plants. We particularly focus on power spreads that are hedgeable
in futures markets in three European electricity markets (Germany, UK, Nordic) over the time
period 2009-2016. We find that market participants who use power spreads need to pay
attention to the fundamental supply and demand changes in the underlying markets (electricity,
CO2, and coal/gas). Specifically, we show that the total vRES capacity installed during 2009-2016
is associated with a drop of 3-22% in hedgeable profit margins of coal and especially gas power
generators. While this shows that the expansion of vRES has a significant negative effect on the
hedgeable profitability of dispatchable, flexible power generators, it also suggests that the
overall decline in power spreads is further driven by the price dynamics in the CO2 and fuel
markets during the sample period. We also find significant persistence (and asymmetric effects)
in the power spreads volatility using a univariate TGARCH model
Can Markov-regime switching models improve power price forecasts? Evidence for German daily power prices
Nonlinear autoregressive Markov regime-switching models are intuitive and frequently proposed time series approaches for the modelling of electricity spot prices. In this paper such models are compared to an ordinary linear autoregressive model with regard to their forecast performance. The study is carried out using German daily spot prices from the European Energy Exchange in Leipzig. Four nonlinear models are used for the forecast study. The resultsof the study suggest that Markov regime-switching models provide better forecasts than linear models. --Electricity spot prices,Markov regime-switching,forecasting
Spot price modeling and the valuation of electricity forward contracts : the role of demand and capacity.
We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premiumPower prices; Demand; Capacity; Forward premium; Forward bias; Market price of capacity risk; Market price of demand risk; PJM; England and Wales; Nord Pool;
The valuation of power futures based on optimal dispatch
The pricing of contingent claims in the wholesale power market is a controversial topic. Important challenges come from the non-storability of electricity and the number of parameters that impact the market. We propose an equilibrium model based on the fundamentals of power generation. In a perfect competitive market, spot electricity prices are determined by the marginal cost of producing the last unit of power. Electricity can be viewed as a derivative of demand, fuels prices and carbon emission price. We extend the Pirrong-Jermakayan model such as to incorporate the main factors driving the marginal cost and the non-linearities of electricity prices with respect to fuels prices. As in the Pirrong-Jermakayan framework, any contingent claims on power must satisfy a high dimensional PDE that embeds a market price of risk, as load is not a traded asset. Analyzing the specificity of the marginal cost in power market, we simplify the problem for evaluating power futures so that it becomes computationally tractable. We test our model on the German EEX for "German Month Futures" with maturity of June and September 2008.power contingent claims, PDE valuation of financial derivatives, unit commitment, market price of risk, EEX
Systematic Features of High-Frequency Volatility in Australian Electricity Markets: Intraday Patterns, Information Arrival and Calendar Effects
This paper investigates the intraday price volatility process in four Australian wholesale electricity markets; namely New South Wales, Queensland, South Australia and Victoria. The data set consists of half-hourly electricity prices and demand volumes over the period 1 January 2002 to 1 June 2003. A range of processes including GARCH, Risk Metrics, normal Asymmetric Power ARCH or APARCH, Student APARCH and skewed Student APARCH are used to model the timevarying variance in prices and the inclusion of news arrival as proxied by the contemporaneous volume of demand, time-of-day, day-of-week and month-of-year effects as exogenous explanatory variables. The skewed Student APARCH model, which takes account of right skewed and fat tailed characteristics, produces the best results in three of the markets with the Student APARCH model performing better in the fourth. The results indicate significant innovation spillovers (ARCH effects)and volatility spillovers (GARCH effects) in the conditional standard deviation equation, even with market and calendar effects included. Intraday prices also exhibit significant asymmetric responses of volatility to the flow of information
Statistical properties and economic implications of Jump-Diffusion Processes with Shot-Noise effects
This paper analyzes the Shot-Noise Jump-Diffusion model of Altmann, Schmidt and Stute (2008), which
introduces a new situation where the effects of the arrival of rare, shocking information to the financial
markets may fade away in the long run. We analyze several economic implications of the model,
providing an analytical expression for the process distribution. We also prove that certain specifications
of this model can provide negative serial persistence. Additionally, we find that the degree of serial
autocorrelation is related to the arrival and magnitude of abnormal information. Finally, a GMM
framework is proposed to estimate the model parameters
Expectations and Forward Risk Premium in the Spanish Power Market
To analyse the forward risk premium in the Spanish electricity market, we adopt not only an ex post approach, but also an ex ante. We find that the sign of the ex post forward premium depends on the unexpected variation in demand and on the unexpected variation in the hydro-energy capacity, and that the ex ante forward premium varies with the expected demand in tight market conditions, showing that the participation of forward dealing agents in the Spanish market responds to risk considerations. Moreover, we find support for the implications derived from the Bessembinder & Lemmon (2002) equilibrium model.
Statistical Properties and Economic Implications of Jump-Diffusion Processes with Shot-Noise Effects
This paper analyzes the Shot-Noise Jump-Diffusion model of Altmann, Schmidt and Stute (2008), which introduces a new situation where the effects of the arrival of rare, shocking information to the financial markets may fade away in the long run. We analyze several economic implications of the model, providing an analytical expression for the process distribution. We also prove that certain specifications of this model can provide negative serial persistence. Additionally, we find that the degree of serial autocorrelation is related to the arrival and magnitude of abnormal information. Finally, a GMM framework is proposed to estimate the model parameters.Filtered Poisson Process, Characteristic Function, Generalized Method of Moments
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