Risk premia in energy markets

Almut Veraart and Luitgard Veraart ()
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Luitgard Veraart: London School of Economics, Postal: Department of Mathematics, Houghton Street, London WC2A 2AE, UK

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Risk premia between spot and forward prices play a key role in energy markets. This paper derives analytic expressions for such risk premia when spot prices are modelled by Lévy semistationary processes. While the relation between spot and forward prices can be derived using classical no-arbitrage arguments as long as the underlying commodities are storable, the situation changes in the case of electricity. Hence, in an empirical study based on electricity spot prices and futures from the European Energy Exchange market, we investigate the empirical behaviour of electricity risk premia from a statistical perspective. We find that a model-based prediction of the spot price has some explanatory power for the corresponding forward price, but there is a significant additional amount of variability, the risk premium, which needs to be accounted for. We demonstrate how a suitable model for electricity forward prices can be formulated and we obtain promising empirical results.

Keywords: Lévy semistationary process; energy market; spot price; forward price; futures; risk premia; stochastic volatility; European Energy Exchange market. (search for similar items in EconPapers)
JEL-codes: C10 C51 G00 G13 (search for similar items in EconPapers)
Pages: 28
Date: 2013-01-24
New Economics Papers: this item is included in nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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