Identifying Risk Factors and Their Premia: A Study on Electricity Prices

Wei Wei () and Asger Lunde ()

No 10/20, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: We propose a multi-factor model and an estimation method based on particle MCMC to identify risk factors in electricity prices. Our model identifies long-run prices, shortrun deviations, and spikes as three main risk factors in electricity spot prices. Under our model, different risk factors have distinct impacts on futures prices and can carry different risk premia. We generalize the Fama-French regressions to analyze properties of true risk premia. We show that model specification plays an important role in detecting time varying risk premia. Using spot and futures prices in the Germany/Austria market, we demonstrate that our proposed model surpasses alternative models that have less risk factors in forecasting spot prices and in detecting time varying risk premia.

Keywords: risk factors; risk premia; futures; particle filter; MCMC (search for similar items in EconPapers)
JEL-codes: C51 G13 Q4 (search for similar items in EconPapers)
Pages: 48
Date: 2020
New Economics Papers: this item is included in nep-ecm, nep-ene, nep-for, nep-ore, nep-reg, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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