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A semiparametric factor model for electricity forward curve dynamics

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  • Szymon Borak
  • Rafał Weron

Abstract

In this paper we introduce the dynamic semiparametric factor model (DSFM) for electricity forward curves. The biggest advantage of our approach is that it not only leads to smooth, seasonal forward curves extracted from exchange traded futures and forward electricity contracts, but also to a parsimonious factor representation of the curve. Using closing prices from the Nordic power market Nord Pool we provide empirical evidence that the DSFM is an efficient tool for approximating forward curve dynamics.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-050.

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Length: 16 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-050

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Keywords: power market; forward electricity curve; dynamic semiparametric factor model;

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References

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  1. Fengler, Matthias R. & Härdle, Wolfgang & Mammen, Enno, 2003. "Implied volatility string dynamics," SFB 373 Discussion Papers 2003,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
  3. Nikolaus Hautsch & Vahidin Jeleskovic, 2008. "Modelling High-Frequency Volatility and Liquidity Using Multiplicative Error Models," SFB 649 Discussion Papers SFB649DP2008-047, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Szymon Borak & Wolfgang Härdle & Enno Mammen & Byeong U. Park, 2007. "Time Series Modelling with Semiparametric Factor Dynamics," SFB 649 Discussion Papers SFB649DP2007-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Fleten, Stein-Erik & Lemming, Jacob, 2003. "Constructing forward price curves in electricity markets," Energy Economics, Elsevier, Elsevier, vol. 25(5), pages 409-424, September.
  6. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(2), pages 89-129.
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Citations

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Cited by:
  1. Nowotarski, Jakub & Tomczyk, Jakub & Weron, Rafal, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," MPRA Paper 42563, University Library of Munich, Germany.
  2. Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models for electricity spot prices," Energy Economics, Elsevier, Elsevier, vol. 32(5), pages 1059-1073, September.
  3. Wolfgang Karl Härdle,Piotr Majer & Melanie Schienle, 2012. "Yield Curve Modeling and Forecasting using Semiparametric Factor Dynamics," SFB 649 Discussion Papers SFB649DP2012-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Liebl, Dominik, 2013. "Modeling and Forecasting Electricity Spot Prices: A Functional Data Perspective," MPRA Paper 50881, University Library of Munich, Germany.
  5. Joanna Janczura & Rafal Weron, 2012. "Inference for Markov-regime switching models of electricity spot prices," HSC Research Reports, Hugo Steinhaus Center, Wroclaw University of Technology HSC/12/01, Hugo Steinhaus Center, Wroclaw University of Technology.
  6. Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer, Springer, vol. 96(3), pages 385-407, July.
  7. Weron, Rafal & Janczura, Joanna, 2010. "Efficient estimation of Markov regime-switching models: An application to electricity wholesale market prices," MPRA Paper 26628, University Library of Munich, Germany.
  8. Xun Lu & Liangjun Su, 2014. "Jackknife Model Averaging for Quantile Regressions," Working Papers, Singapore Management University, School of Economics 11-2014, Singapore Management University, School of Economics.
  9. Yan Li & Liangjun Su & Yuewu Xu, 2014. "A Combined Approach to the Inference of Conditional Factor Models," Working Papers, Singapore Management University, School of Economics 10-2014, Singapore Management University, School of Economics.
  10. Cartea, Álvaro & González-Pedraz, Carlos, 2012. "How much should we pay for interconnecting electricity markets? A real options approach," Energy Economics, Elsevier, Elsevier, vol. 34(1), pages 14-30.

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