Modelling energy forward prices

Joanna Janczura and Aleksander Weron

No HSC/08/03, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology

Abstract: The main purpose of the paper is to present, how derivatives valuing methodology, known from financial and commodities markets, can be applied to the electricity market. We compare an application of three recent models. We start with the convenience yield approach, then we analyse the application of the interest rates methodology, proposed by Hinz et al. (2005). Finally, the last approach built by Bjerksund et al (2000) on direct modelling of the forward price dynamics is discussed. We also calibrate the theoretical models to the Nord Pool market data. The empirical analysis shows how these models can be used for evaluation of options prices. Moreover, data study gives an evidence of the seasonal term structure of the returns variance.

Keywords: Forward contracts; Nord Pool financial market; Options valuation; Volatility modelling (search for similar items in EconPapers)
JEL-codes: G13 Q41 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2008
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Published in the Proceedings of EEM08 (doi:10.1109/EEM.2008.4579020).

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http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_08_03.pdf Original draft, 2008 (application/pdf)

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