IDEAS home Printed from https://ideas.repec.org/p/cdl/anderf/qt12w8v7jj.html
   My bibliography  Save this paper

Electricity prices and power derivatives: Evidence from the Nordic Power Exchange

Author

Listed:
  • Lucia, Julio J.
  • Schwartz, Eduardo

Abstract

This paper examines the importance of the regular patterns in the behavior of electricity prices, and its implications for the purposes of derivative pricing. We analyze the Nordic Power Exchange’s spot, futures, and forward prices. We conclude that the seasonal systematic pattern throughout the year, in particular, is of crucial importance in explaining the shape of the futures/forward curve. Moreover, in the context of the one and two factor models analyzed in this paper, a simple sinusoidal function is adequate in order capture the seasonal pattern of the futures and forward curve directly implied by the seasonal behavior of spot electricity prices.

Suggested Citation

  • Lucia, Julio J. & Schwartz, Eduardo, 2000. "Electricity prices and power derivatives: Evidence from the Nordic Power Exchange," University of California at Los Angeles, Anderson Graduate School of Management qt12w8v7jj, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt12w8v7jj
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/12w8v7jj.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lo, Andrew W & Wang, Jiang, 1995. "Implementing Option Pricing Models When Asset Returns Are Predictable," Journal of Finance, American Finance Association, vol. 50(1), pages 87-129, March.
    2. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    3. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    4. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    5. Hull, John & White, Alan, 1993. "One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 235-254, June.
    6. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    7. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
    2. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
    3. Bottazzi, G. & Sapio, S. & Secchi, A., 2005. "Some statistical investigations on the nature and dynamics of electricity prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 54-61.
    4. Tsitakis, D. & Xanthopoulos, S. & Yannacopoulos, A.N., 2006. "A closed-form solution for the price of cross-commodity electricity derivatives," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 371(2), pages 543-551.
    5. Latini, Luca & Piccirilli, Marco & Vargiolu, Tiziano, 2019. "Mean-reverting no-arbitrage additive models for forward curves in energy markets," Energy Economics, Elsevier, vol. 79(C), pages 157-170.
    6. Eduardo Martínez Chombo, 2005. "Decomposing electricity prices with jumps," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 20(1), pages 27-52.
    7. Miha Troha & Raphael Hauser, 2014. "Calculation of a power price equilibrium," Papers 1409.6645, arXiv.org.
    8. Pircalabu, A. & Hvolby, T. & Jung, J. & Høg, E., 2017. "Joint price and volumetric risk in wind power trading: A copula approach," Energy Economics, Elsevier, vol. 62(C), pages 139-154.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    3. Gibson, Rajna & Lhabitant, Francois-Serge & Talay, Denis, 2010. "Modeling the Term Structure of Interest Rates: A Review of the Literature," Foundations and Trends(R) in Finance, now publishers, vol. 5(1–2), pages 1-156, December.
    4. Wolfgang Bühler & Olaf Korn & Rainer Schöbel, 2005. "Hedging Long-Term Forwards with Short-Term Futures: A Two-Regime Approach," Review of Derivatives Research, Springer, vol. 7(3), pages 185-212, October.
    5. Shane Miller, 2007. "Pricing of Contingent Claims Under the Real-World Measure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2007.
    6. Shane Miller, 2007. "Pricing of Contingent Claims Under the Real-World Measure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 25, July-Dece.
    7. Mondher Bellalah, 2009. "Derivatives, Risk Management & Value," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7175, June.
    8. Tarik Bazgour & Federico Platania, 2022. "A defaultable bond model with cyclical fluctuations in the spread process," Annals of Operations Research, Springer, vol. 312(2), pages 647-672, May.
    9. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
    10. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.
    11. Björn Lutz, 2010. "Pricing of Derivatives on Mean-Reverting Assets," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-02909-7, October.
    12. Jianqing Fan, 2004. "A selective overview of nonparametric methods in financial econometrics," Papers math/0411034, arXiv.org.
    13. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
    14. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    15. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2015. "Pricing of Long-dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates," Research Paper Series 366, Quantitative Finance Research Centre, University of Technology, Sydney.
    16. Ke Du, 2013. "Commodity Derivative Pricing Under the Benchmark Approach," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2013.
    17. Abel Azze & Bernardo D'Auria & Eduardo Garc'ia-Portugu'es, 2022. "Optimal exercise of American options under time-dependent Ornstein-Uhlenbeck processes," Papers 2211.04095, arXiv.org, revised Dec 2023.
    18. Michael W. Brandt & Amir Yaron, 2003. "Time-Consistent No-Arbitrage Models of the Term Structure," NBER Working Papers 9458, National Bureau of Economic Research, Inc.
    19. Philippe Raimbourg & Paul Zimmermann, 2022. "Is normal backwardation normal? Valuing financial futures with a local index-rate covariance," Post-Print hal-04011013, HAL.
    20. Iivo Vehvilainen, 2002. "Basics of electricity derivative pricing in competitive markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 45-60.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdl:anderf:qt12w8v7jj. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/aguclus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.