A semiparametric factor model for electricity forward curve dynamics

Borak, Szymon and Weron, Rafal (2008): A semiparametric factor model for electricity forward curve dynamics. Forthcoming in: Journal of Energy Markets No. 1 (3) (2008): pp. 3-16.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: power market, forward electricity curve, dynamic semiparametric factor model
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q40 - General; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing

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