A nonparametric model for spot price dynamics and pricing of futures contracts in electricity markets

2014 ◽  
Vol 18 (5) ◽  
Author(s):  
Katja Ignatieva
Keyword(s):  
Electricity Markets ◽  
Continuous Time ◽  
Regime Switching ◽  
Diffusion Processes ◽  
Market Price ◽  
Parametric Models ◽  
Futures Contracts ◽  
Spot Price ◽  
Nonparametric Model ◽  
Spot Prices

AbstractThis paper deals with the estimation of continuous time diffusion processes describing the dynamics of electricity spot prices. Different parametric models have been proposed in the literature, each attempting to capture empirical characteristics and stylized facts of the electricity market like the spiky behavior of the spot prices. Although jump-diffusion and regime-switching models perform reasonably well, there is always a trade-off between model parsimony and adequacy. The results in the literature indicate that none of the models seem to consistently outperform its counterparts. This paper avoids making parametric assumption about the drift and the diffusion coefficient functions of the underlying electricity spot prices, and estimates these functions together with the market price of risk in a nonparametric way. The latter allows us to price futures contracts written on electricity spots. Using electricity spot prices and futures data from the regional electricity markets in Australia, we show that besides offering a convenient way of estimating the continuous-time models for electricity spot prices, our nonparametric estimation procedure performs well in- and out-of-sample when dealing with pricing of future contracts.

Pricing of Futures Contracts

2018 ◽  
Author(s):  
Timothy A. Krause
Keyword(s):  
Fair Value ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Spot Price ◽  
Futures Prices ◽  
No Arbitrage ◽  
Spot Prices ◽  
Cost Of Carry ◽  
Contract Expiration ◽  
The Cost

This chapter examines the relation between futures prices relative to the spot price of the underlying asset. Basic futures pricing is characterized by the convergence of futures and spot prices during the delivery period just before contract expiration. However, “no arbitrage” arguments that dictate the fair value of futures contracts largely determine pricing relations before expiration. Although the cost of carry model in its various forms largely determines futures prices before expiration, the chapter presents alternative explanations. Related commodity futures complexes exhibit mean-reverting behavior, as seen in commodity spread markets and other interrelated commodities. Energy commodity futures prices can be somewhat accurately modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process, although whether these models provide economically significant excess returns is uncertain.

A Bivariate Model for Deman and Spot Price of Electricity

2012 ◽  
Vol 433-440 ◽  
pp. 3910-3917
Author(s):  
Hilary Green ◽  
Nino Kordzakhia ◽  
Ruben Thoplan
Keyword(s):  
Electricity Markets ◽  
Historical Data ◽  
Extreme Values ◽  
Spot Price ◽  
Bivariate Model ◽  
Spot Prices ◽  
Short Period ◽  
Detailed Statistical Analysis ◽  
Modelling Methodology ◽  
The Mean

In this paper bivariate modelling methodology, solely applied to the spot price of electricity or demand for electricity in earlier studies, is extended to a bivariate process of spot price of electricity and demand for electricity. The suggested model accommodates common idiosyncrasies observed in deregulated electricity markets such as cyclical trends in price and demand for electricity, occurrence of extreme spikes in prices, and mean-reversion effect seen in settling of prices from extreme values to the mean level over a short period of time. The paper presents detailed statistical analysis of historical data of daily averages of electricity spot prices and corresponding demand for electricity. The data is obtained from the NSW section of Australian Energy Markets.

CALIBRATION OF MULTIFACTOR MODELS IN ELECTRICITY MARKETS

2004 ◽  
Vol 07 (02) ◽  
pp. 101-120 ◽  
Author(s):  
MARTIN BARLOW ◽  
YURI GUSEV ◽  
MANPO LAI
Keyword(s):  
Kalman Filter ◽  
Stochastic Processes ◽  
Extended Kalman Filter ◽  
Electricity Markets ◽  
Kalman Filters ◽  
Historical Data ◽  
Spot Price ◽  
Market Data ◽  
Multifactor Models ◽  
Spot Prices

Spot prices of electricity and other energy commodities are often modeled by multifactor stochastic processes. This poses a problem of estimating models' parameters based on historical data, i.e. calibrating them to markets. Here we show how a traditional tool of Kalman Filters can be successfuly applied to do this task. We study two mean-reverting log-spot price models and the Pilipovic model using correspondingly Kalman Filter the extended Kalman Filter. The results of applying this method to market data from several power exchanges are discussed.

scholarly journals Valuation of Swing Options under a Regime-Switching Mean-Reverting Model

2019 ◽  
Vol 2019 ◽  
pp. 1-14
Author(s):  
Lingjie Shao ◽  
Kaili Xiang
Keyword(s):  
Electricity Market ◽  
Regime Switching ◽  
Seasonal Pattern ◽  
Market Price ◽  
Spot Price ◽  
Programming Approach ◽  
Volume Constraint ◽  
Uhlenbeck Process ◽  
Swing Options ◽  
Ornstein Uhlenbeck Process

In this paper, we study the valuation of swing options on electricity in a model where the underlying spot price is set to be the product of a deterministic seasonal pattern and Ornstein-Uhlenbeck process with Markov-modulated parameters. Under this setting, the difficulties of pricing swing options come from the various constraints embedded in contracts, e.g., the total number of rights constraint, the refraction time constraint, the local volume constraint, and the global volume constraint. Here we propose a framework for the valuation of the swing option on the condition that all the above constraints are nontrivial. To be specific, we formulate the pricing problem as an optimal stochastic control problem, which can be solved by the trinomial forest dynamic programming approach. Besides, empirical analysis is carried out on the model. We collect historical data in Nord Pool electricity market, extract the seasonal pattern, calibrate the Ornstein-Uhlenbeck process parameters in each regime, and also get market price of risk. Finally, on the basis of calibration results, a specific numerical example concerning all typical constraints is presented to demonstrate the valuation procedure.

scholarly journals Granger Causality Network Methods for Analyzing Cross-Border Electricity Trading between Greece, Italy, and Bulgaria

Energies ◽  
2020 ◽  
Vol 13 (4) ◽  
pp. 900 ◽  
Author(s):  
George P. Papaioannou ◽  
Christos Dikaiakos ◽  
Christos Kaskouras ◽  
George Evangelidis ◽  
Fotios Georgakis
Keyword(s):  
Granger Causality ◽  
Electricity Markets ◽  
Historical Data ◽  
Spot Price ◽  
Spot Prices ◽  
Cross Border ◽  
Electricity Trading ◽  
Network Methods ◽  
Generation Capacity ◽  
Market Variables

Italy, Greece, and, to a lesser degree, Bulgaria have experienced fast growth in their renewable generation capacity (RESc) over the last several years. The consequences of this fact include a decrease in spot wholesale prices in electricity markets and a significant effect on cross border trading (CBT) among neighboring interconnected countries. In this work, we empirically analyzed historical data on fundamental market variables (i.e., spot prices, load, RES generation) as well as CBT data (imports, exports, commercial schedules, net transfer capacities, etc.) on the Greek, Italian, and Bulgarian electricity markets by applying the Granger causality connectivity analysis (GCCA) approach. The aim of this analysis was to detect all possible interactions among the abovementioned variables, focusing in particular on the effects of growing shares of RES generation on the commercial electricity trading among the abovementioned countries for the period 2015–2018. The key findings of this paper are summarized as the following: The RES generation in Italy, for the period examined, drives the spot prices in Greece via commercial schedules. In addition, on average, spot price fluctuations do not affect the commercial schedules of energy trading between Greece and Bulgaria.

scholarly journals Gold futures prices: An investigation into the theories of storage and forecast power and premium

1990 ◽  
Vol 21 (1/2) ◽  
pp. 1-6
Author(s):  
M. J. Page
Keyword(s):  
Interest Rates ◽  
Futures Contracts ◽  
Dominant Factor ◽  
Spot Price ◽  
Futures Prices ◽  
Short Term ◽  
Spot Prices ◽  
The Difference ◽  
Gold Futures ◽  
Theory Of Storage

There are two principal theories of commodity futures prices. The theory of storage, which explains the difference between contemporaneous futures and spot prices (the basis) in terms of interest rates, warehousing costs, and convenience yields, and the theory of forecast power and premium, which is based on the assumption that the futures price is a biased estimate of the expected spot price. This research paper examines the applicability of the two theories to the pricing of short term gold futures contracts. The findings suggest that, in terms of the theory of storage, the basis variability is explained principally by interest rate changes for contracts of between three and six months duration, while for one-month contracts varying convenience yields appear to be the dominant factor. The low basis variability of gold futures contracts results in inconclusive findings with respect to the theory of forecast power and premium. There is, however, evidence to suggest that the basis contains some ability to predict the expected premium or bias.

Commodity Exchange-Traded Funds

2018 ◽  
Author(s):  
Christopher Milliken
Keyword(s):  
Portfolio Diversification ◽  
Futures Contracts ◽  
Spot Price ◽  
Exchange Traded Funds ◽  
Investment Strategies ◽  
Regulatory Structure ◽  
Commodity Exchange ◽  
Asset Class ◽  
Exchange Traded Fund

Commodity exchange-traded funds (ETCs), which debuted in 2004, enable investors to access an asset class previously difficult or expensive to access. Although a small segment of the overall exchange-traded fund (ETF) universe, ETCs have grown in popularity with both speculators and investors looking for long-term portfolio diversification. Examples of the types of commodities that are now accessible through ETCs include gold, oil, and agricultural. The literature on ETCs is limited, but academic and industry work has centered on using futures contracts to replicate the performance of the underlying commodities spot price as well as the effect additional capital has had on the integrity of the futures market. This chapter covers this topic by reviewing the growth, investment strategies, and regulatory structure of ETCs as well as the underlying effects these funds have had on the underlying markets with which they engage.

scholarly journals Economic Evaluation of Wind Power Projects in a Mix of Free and Regulated Market Environments in Brazil

Energies ◽  
2021 ◽  
Vol 14 (11) ◽  
pp. 3325
Author(s):  
Vanderson Aparecido Delapedra-Silva ◽  
Paula Ferreira ◽  
Jorge Cunha ◽  
Herbert Kimura
Keyword(s):  
Electricity Market ◽  
Free Market ◽  
Market Price ◽  
Investment Project ◽  
Spot Price ◽  
Market Uncertainty ◽  
Discounted Cash Flow ◽  
Expected Return ◽  
Price Expectation ◽  
Free Market Price

The electricity market in Brazil is basically organized under two parts: the regulated market, where energy is traded through auctions, and the free market, where market participants freely negotiate the price and quantity of electricity. Although revenues obtained in the regulated market tend to be lower than in the free market, the auctions’ results show that investors still value the lesser degree of uncertainty associated with the regulated market. However, a growing interest in the free market by investors is recognized since the price of electricity tends to be higher. Therefore, this study investigates four free market price scenarios to assess the expected return for investors, using the traditional discounted cash flow approach complemented with Monte Carlo simulation to address market uncertainty. The study breaks new ground by capturing the weekly price fluctuations and including the price elasticity of demand of the free market. The results seem to indicate that the disclosure of the ceiling and floor price limits for the spot price can signal important information about the agents’ price expectation in the free market and can be used for investment project evaluation.

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