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Electricity Derivatives Pricing with Forward-Looking Information

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  • Füss, Roland

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  • Mahringer, Steffen

    ()

  • Prokopczuk, Marcel

    ()

Abstract

In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We employ a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the general importance of forward-looking information for electricity derivatives pricing. However, we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity, whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead.
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Suggested Citation

  • Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Derivatives Pricing with Forward-Looking Information," Working Papers on Finance 1317, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2013:17
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    Citations

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    Cited by:

    1. Afanasyev, Dmitriy O. & Fedorova, Elena A. & Popov, Viktor U., 2015. "Fine structure of the price–demand relationship in the electricity market: Multi-scale correlation analysis," Energy Economics, Elsevier, vol. 51(C), pages 215-226.
    2. Mahringer, Steffen & Fuess, Roland & Prokopczuk, Marcel, 2015. "Electricity Market Coupling and the Pricing of Transmission Rights: An Option-based Approach," Working Papers on Finance 1512, University of St. Gallen, School of Finance.
    3. Hain, Martin & Schermeyer, Hans & Uhrig-Homburg, Marliese & Fichtner, Wolf, 2017. "An Electricity Price Modeling Framework for Renewable-Dominant Markets," Working Paper Series in Production and Energy 23, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    4. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Spot and Derivatives Pricing when Markets are Interconnected," Working Papers on Finance 1323, University of St. Gallen, School of Finance.
    5. repec:gam:jeners:v:11:y:2018:i:5:p:1255-:d:146305 is not listed on IDEAS
    6. repec:eee:rensus:v:81:y:2018:i:p1:p:1513-1521 is not listed on IDEAS

    More about this item

    Keywords

    Electricity Futures; Fundamental Model; Derivatives Pricing; Forward-looking Information; Enlargement of Filtrations;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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