Futures pricing in electricity markets based on stable CARMA spot models
AbstractWe present a new model for the electricity spot price dynamics, which is able to capture seasonality, low-frequency dynamics and the extreme spikes in the market. Instead of the usual purely deterministic trend we introduce a non-stationary independent increments process for the low-frequency dynamics, and model the large fluctuations by a non-Gaussian stable CARMA process. The model allows for analytic futures prices, and we apply these to model and estimate the whole market consistently. Besides standard parameter estimation, an estimation procedure is suggested, where we fit the non-stationary trend using futures data with long time until delivery, and a robust $L^1$-filter to find the states of the CARMA process. The procedure also involves the empirical and theoretical risk premiums which -- as a by-product -- are also estimated. We apply this procedure to data from the German electricity exchange EEX, where we split the empirical analysis into base load and peak load prices. We find an overall negative risk premium for the base load futures contracts, except for contracts close to delivery, where a small positive risk premium is detected. The peak load contracts, on the other hand, show a clear positive risk premium, when they are close to delivery, while the contracts in the longer end also have a negative premium.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1201.1151.
Date of creation: Jan 2012
Date of revision:
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-ECM-2012-01-18 (Econometrics)
- NEP-ENE-2012-01-18 (Energy Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
- Benth, Fred Espen & Cartea, Álvaro & Kiesel, Rüdiger, 2008.
"Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium,"
Journal of Banking & Finance,
Elsevier, vol. 32(10), pages 2006-2021, October.
- Fred Espen Benth & Alvaro Cartea & Ruediger Kiesel, 2006. "Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium," Birkbeck Working Papers in Economics and Finance 0611, Birkbeck, Department of Economics, Mathematics & Statistics.
- Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, 08.
- Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
- P. Brockwell, 2001. "Lévy-Driven Carma Processes," Annals of the Institute of Statistical Mathematics, Springer, vol. 53(1), pages 113-124, March.
- Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, 06.
- Brockett, Patrick L. & Tucker, Howard G., 1977. "A conditional dichotomy theorem for stochastic processes with independent increments," Journal of Multivariate Analysis, Elsevier, vol. 7(1), pages 13-27, March.
- Kolos, Sergey P. & Ronn, Ehud I., 2008. "Estimating the commodity market price of risk for energy prices," Energy Economics, Elsevier, vol. 30(2), pages 621-641, March.
- Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
- Claudia Kluppelberg & Thilo Meyer-Brandis & Andrea Schmidt, 2010. "Electricity spot price modelling with a view towards extreme spike risk," Quantitative Finance, Taylor & Francis Journals, vol. 10(9), pages 963-974.
- Paschke, Raphael & Prokopczuk, Marcel, 2010. "Commodity derivatives valuation with autoregressive and moving average components in the price dynamics," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2742-2752, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.