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Variance optimal hedging with application to Electricity markets

Xavier Warin

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Abstract: In Electricity markets, illiquidity, transaction costs and market price characteristics prevent managers to replicate exactly contracts. A residual risk is always present and the hedging strategy depends on a risk criterion chosen. We present an algorithm to hedge a position for a mean variance criterion taking into account the transaction cost and the small depth of the market. We show its effectiveness on a typical problem coming from the field of electricity markets.

Date: 2017-11, Revised 2018-08
New Economics Papers: this item is included in nep-ene, nep-reg and nep-rmg
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Handle: RePEc:arx:papers:1711.03733