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A semiparametric factor model for electricity forward curve dynamics

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Author Info
Borak, Szymon
Weron, Rafal

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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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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10421.

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Date of creation: 10 Jul 2008
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Handle: RePEc:pra:mprapa:10421

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

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Fleten, Stein-Erik & Lemming, Jacob, 2003. "Constructing forward price curves in electricity markets," Energy Economics, Elsevier, vol. 25(5), pages 409-424, September. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor and Francis Journals, vol. 13(2), pages 89-129, June. [Downloadable!] (restricted)
  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. [Downloadable!]
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  5. Rafal Weron & Adam Misiorek, 2005. "Modeling and forecasting electricity loads: A comparison," Econometrics 0502004, EconWPA. [Downloadable!]
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