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Electricity forward curves with thin granularity: Theory and empirical evidence in the hourly EPEXspot market

Ruggero Caldana, Gianluca Fusai and Andrea Roncoroni

European Journal of Operational Research, 2017, vol. 261, issue 2, 715-734

Abstract: We propose a constructive definition of electricity forward price curve with cross-sectional timescales featuring hourly frequency on. The curve is jointly consistent with both risk-neutral market information represented by baseload and peakload futures quotes, and historical market information, as mirrored by periodical patterns exhibited by the time series of day-ahead prices. From a methodological standpoint, we combine nonparametric filtering with monotone convex interpolation such that the resulting forward curve is pathwise smooth and monotonic, cross-sectionally stable, and time local. From an empirical standpoint, we exhibit these features in the context of EPEX Spot and EEX Derivative markets. We perform a backtesting analysis to assess the relative quality of our forward curve estimate compared to the benchmark market model of Benth, Koekebakker, and Ollmar (2007).

Keywords: Energy finance; Forward pricing; Electricity markets; Forward curve construction (search for similar items in EconPapers)
Date: 2017
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