Template-Type: ReDIF-Article 1.0
Author-Name:  Iván Blanco, Juan Ignacio Peña, and Rosa Rodriguez
Title:  Modelling Electricity Swaps with Stochastic Forward Premium Models
Classification-JEL: F0
Volume:  Volume 39
Issue:  Number 2
Year:  2018
Abstract:  We present a new model for pricing electricity swaps. Two general factors affect contracts but unique risk elements affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique elements are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk but our model gives estimates that are more exact.
Handle: RePEc:aen:journl:ej39-2-Pena
File-URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=3050
File-Format: text/html
File-Restriction: Access to full text is restricted to IAEE members and subscribers.