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A Structural Model for Electricity Forward Prices
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2016-05-23
Author(s)
Benth, Fred Espen
Abstract (De)
Structural models for forward electricity prices are of great relevance nowadays, given the major structural changes in the market due to the increase of renewable energy in the production mix. In this study, we derive a spatio-temporal dynamical model based on the Heath-Jarrow-Morton (HJM) approach under the Musiela parametrization, which ensures an arbitrage-free model for electricity Forward prices. The model is fitted to a unique data set of historical price Forward curves. As a particular feature of the model, we disentangle the temporal from spatial (maturity) effects on the dynamics of forward prices, and shed light on the statistical properties of risk premia, of the noise volatility term structure and of the spatio-temporal noise correlation structures. We find that the short-term risk premia oscillates around zero, but becomes negative in the long run. We identify the Samuelson effect in the volatility term structure and volatility bumps, explained by market fundamentals. Furthermore we find evidence for coloured noise and correlated residuals, which we model by a Hilbert space-valued normal inverse Gaussian Lévy process with a suitable covariance functional.
Language
English
HSG Classification
contribution to scientific community
Publisher
SoF - HSG
Publisher place
St. Gallen
Number
2016/11
Pages
45
Subject(s)
Division(s)
Contact Email Address
florentina.paraschiv@unisg.ch
Eprints ID
248403