Vázquez, Miguel and Sánchez-Úbeda, Eugenio F. and Berzosa, Ana and Barquín, Julián (2008): Short-term evolution of forward curves and volatility in illiquid power markets.
Download (492Kb) | Preview
We propose in this paper a model for the description of electricity spot prices, which we use to describe the dynamics of forward curves. The spot price model is based on a long-term/short-term decomposition, where the price is thought of as made up of two factors: A long-term equilibrium level and short-term movements around the equilibrium. We use a non-parametric approach to model the equilibrium level of power prices, and a mean-reverting process with GARCH volatility to describe the dynamics of the short-term component. Then, the model is used to derive the expression of the short-term dynamics of the forward curve implicit in spot prices. The rationale for the approach is that information concerning forward prices is not available in most of power markets, and the direct modeling of the forward curve is a difficult task. Moreover, power derivatives are typically written on forward contracts, and usually based on average prices of forward contracts. Then, it is difficult to obtain analytical expressions for the forward curves. The model of forward prices allows for the valuation of power derivatives, as well as the calculation of the volatilities and correlations required in risk management activities. Finally, the methodology is proven in the context of the Spanish wholesale market
|Item Type:||MPRA Paper|
|Original Title:||Short-term evolution of forward curves and volatility in illiquid power markets|
|Keywords:||Forward curves;Power Markets;GARCH volatility;nonparametric regression|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
|Depositing User:||Miguel Vázquez|
|Date Deposited:||09. Jun 2008 08:29|
|Last Modified:||15. Mar 2013 03:06|
Black, F. (1976). The pricing of commodity contracts. Journal of Financial Economics, 3: pp. 167-79.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31: pp. 307-27.
Borovkova, S. (2006). Detecting market transitions and energy futures risk management using principal components. The European Journal of Finance, 12: pp. 495-512.
Clewlow, L. and Strickland, C. (1999). A multifactor model for energy derivatives. University of Technology, Sydney. QFRG Research Paper Series 28.
Deng, S. (1999). Financial methods in deregulated electricity markets. Ph.D. Thesis, University of California at Berkeley.
Duffie, D. (2001). Dynamic asset pricing theory (3rd edition). Princeton, Princeton University Press.
Escribano, Á., Peña, J. I. and Villaplana, P. (2002). Modeling electricity prices: International evidence. Departamento de Economía, Universidad Carlos III, Madrid. Working Paper 02-27, Economic Series 08.
Eydeland, A. and Wolyniec, K. (2003). Energy and power risk management: New developments in modeling, pricing, and hedging. John Wiley & Sons.
Garcia, R., Ghysels, E. and Renault, E. (2004). The econometrics of option pricing. CIRANO. Working Paper 2004s-04.
Geman, H. and Roncoroni, A. (2002). A class of marked pont processes for modelling electricity prices. ESSEC. Working Paper.
Hastie, T., Tibshirani, R. and Friedman, J. (2001). The elements of statistical learning. Springer-Verlag.
Heston, S. L. and Nandi, S. (1997). A closed form GARCH option pricing model. Federal Reserve Bank of Atlanta. Working Paper 97-9.
Lucia, J. J. and Schwartz, E. S. (2002). Electricity prices and power derivatives: Evidence from the Nordic Power Exchange. Review of Derivatives Research, 5: pp. 5-50.
Lutkepohl, H. (1993). Introduction to multiple time series analysis. Springer-Verlag.
Pilipovic, D. (1997). Energy risk: Valuing and managing energy derivatives. McGraw-Hill.
Sánchez-Úbeda, E. F. (1999). Models for data Analysis: Contributions to automatic learning. PhD. Thesis. Universidad Pontificia Comillas.
Sánchez-Úbeda, E. F. and Wehenkel, L. (1998). The Hinges Model: A one-dimensional countinuous piecewise polynomial model. Information Processing and Management of Uncertainty in Knowledge-based Systems, Paris.
Schwartz, E. S. (1997). The stochastic behavior of commodity prices: Implications for valuation and hedging. Journal of finance, 52 (3): pp. 923-73.
Schwartz, E. S. and Smith, J. E. (2000). Short-term variations and long-term dynamics in commodity prices. Management Science, 46 (7): pp. 893-911.
Vázquez, M. and Barquín, J. (2007). Price and volatility dynamics in electricity markets: A fundamental approach with strategic interaction representation. Instituto de Investigación Tecnológica, Universidad Pontificia Comillas. IIT Working Paper.
Ventosa, M., Baíllo, Á., Rivier, M. and Ramos, A. (2005). Electricity market modelling trends. Energy Policy, 3 (7): pp. 897-913.
Available Versions of this Item
Short-term evolution of forward curves and volatility in illiquid power market. (deposited 04. Jun 2008 04:33)
- Short-term evolution of forward curves and volatility in illiquid power markets. (deposited 09. Jun 2008 08:29) [Currently Displayed]