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Hedging Strategy for Electricity Market Price Volatility: The Case of Turkish Electricity Market

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  • Sezer Bozkus Kahyaoglu
  • M. Vedat Pazarlioglu

Abstract

Turkish Electricity Market was launched in 2006. This event could be treated as a new and revolutionary period in Turkish Energy Markets since the electricity spot prices are determined by the market conditions thereafter. There was an amendment and advancement in the electricity price determination system in 2009 in order to enhance the electricity pricing mechanisms. In this respect, the volatility of electricity prices becomes the major explanatory variable for the forecast of electricity price demand in Turkey. It is important for the markets participants to analyze and compare historical price behavior across the energy markets, along with a forecast of price volatility which provide price signals which can be incorporated into their inter-jurisdiction energy trade planning. In addition, these market participants may consider price volatility signals in their future investment plans in order to minimize the potential financial risks to which they might be exposed. However there is neither electricity nor any other energy futures market which makes it difficult for the market participants to utilize as hedging instruments in Turkey. In this work, Petrol Future Contracts are analyzed to forecast whether these contracts could be used as hedging instruments against the volatility of Turkish electricity market prices. Volatility in the Turkish electricity market prices are quantified and the optimal hedging ratio is estimated by using relevant econometric methods and approaches. Based on our empirical findings, recommendations are made for the market participants to assist them for hedging strategies and minimizing the energy costs.

Suggested Citation

  • Sezer Bozkus Kahyaoglu & M. Vedat Pazarlioglu, 2014. "Hedging Strategy for Electricity Market Price Volatility: The Case of Turkish Electricity Market," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 196-210, March.
  • Handle: RePEc:bor:bifeca:v:1:y:2014:i:2:p:196-210
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    Keywords

    Hedge Ratio; M-GARCH; Electricity Price; Volatility;

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