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Electricity derivatives pricing with forward-looking information

Roland Füss (), Steffen Mahringer and Marcel Prokopczuk ()

Journal of Economic Dynamics and Control, 2015, vol. 58, issue C, 34-57

Abstract: In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We employ a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the general importance of forward-looking information for electricity derivatives pricing. However, we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity, whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead.

Keywords: Electricity futures; Fundamental model; Derivatives pricing; Forward-looking information; Enlargement of filtrations (search for similar items in EconPapers)
JEL-codes: G12 G13 Q4 Q41 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Electricity Derivatives Pricing with Forward-Looking Information (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:58:y:2015:i:c:p:34-57

DOI: 10.1016/j.jedc.2015.05.016

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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