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Variance optimal hedging with application to Electricity markets

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  • Xavier Warin

Abstract

In Electricity markets, illiquidity, transaction costs and market price characteristics prevent managers to replicate exactly contracts. A residual risk is always present and the hedging strategy depends on a risk criterion chosen. We present an algorithm to hedge a position for a mean variance criterion taking into account the transaction cost and the small depth of the market. We show its effectiveness on a typical problem coming from the field of electricity markets.

Suggested Citation

  • Xavier Warin, 2017. "Variance optimal hedging with application to Electricity markets," Papers 1711.03733, arXiv.org, revised Aug 2018.
    • Handle: RePEc:arx:papers:1711.03733
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    References listed on IDEAS

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