VOLATILITY AND LIQUIDITY ON HIGH-FREQUENCY ELECTRICITY FUTURES MARKETS: EMPIRICAL ANALYSIS AND STOCHASTIC MODELING

Marcel Kremer, Fred Espen Benth (), Björn Felten () and Rüdiger Kiesel
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Marcel Kremer: Chair for Energy Trading and Finance, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany
Fred Espen Benth: Department of Mathematics, University of Oslo, P. O. Box 1053 Blindern, 0316 Oslo, Norway
Björn Felten: Chair for Management Science and Energy Economics, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany
Rüdiger Kiesel: Chair for Energy Trading and Finance, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany2Department of Mathematics, University of Oslo, P. O. Box 1053 Blindern, 0316 Oslo, Norway

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 04, 1-38

Abstract: This paper investigates the relationship between volatility and liquidity on the German electricity futures market based on high-frequency intraday prices. We estimate volatility by the time-weighted realized variance acknowledging that empirical intraday prices are not equally spaced in time. Empirical evidence suggests that volatility of electricity futures decreases as time approaches maturity, while coincidently liquidity increases. Established continuous-time stochastic models for electricity futures prices involve a growing volatility function in time and are thus not able to capture our empirical findings a priori. In Monte Carlo simulations, we demonstrate that incorporating increasing liquidity into the established models is key to model the decreasing volatility evolution.

Keywords: Volatility; liquidity; electricity futures; high-frequency prices; stochastic modeling; Monte Carlo simulation; time-weighted realized variance (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S0219024920500272

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