Liquidity risks on power exchanges

Gauthier de Maere D’aertrycke, () and Yves Smeers ()
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Gauthier de Maere D’aertrycke,: Université catholique de Louvain, CORE and INMA, B-1348 Louvain-la-Neuve, Belgium
Yves Smeers: Université catholique de Louvain, CORE and INMA, B-1348 Louvain-la-Neuve, Belgium
Authors registered in the RePEc Author Service: Gauthier de Maere d'Aertrycke

No 2010005, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Financial derivatives are important hedging tool for asset’s manager. Electricity is by its very nature the most volatile commodity, which creates big incentive to share the risk among the market participants through financial contracts. But, even if volume of derivatives contracts traded on Power Exchanges has been growing since the beginning of the restructuring of the sector, electricity markets continue to be considerably less liquid than other commodities. This paper tries to quantify the effect of this insufficient liquidity on power exchange, by introducing a pricing equilibrium model for power derivatives where agents can not hedge up to their desired level. Mathematically, the problem is a two stage stochastic Generalized Nash Equilibrium and its solution is not unique. Computing a large panel of solutions, we show how the risk premium and player’s profit are affected by the illiquidity.

Keywords: illiquidity; electricity; power exchange; artitrage; generalized Nash Equilibrium; equilibrium based model; coherent risk valuation (search for similar items in EconPapers)
JEL-codes: C61 G13 (search for similar items in EconPapers)
Date: 2010-02-01
New Economics Papers: this item is included in nep-ene
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