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Futures pricing in electricity markets based on stable CARMA spot models

Author

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  • Benth, Fred Espen
  • Klüppelberg, Claudia
  • Müller, Gernot
  • Vos, Linda

Abstract

We present a new model for the electricity spot price dynamics, which is able to capture seasonality, low-frequency dynamics and extreme spikes in the market. Instead of the usual purely deterministic trend we introduce a non-stationary independent increment process for the low-frequency dynamics, and model the large fluctuations by a non-Gaussian stable CARMA process. The model allows for analytic futures prices, and we apply these to model and estimate the whole market consistently. Besides standard parameter estimation, an estimation procedure is suggested, where we fit the non-stationary trend using futures data with long time until delivery, and a robust L1-filter to find the states of the CARMA process. The procedure also involves the empirical and theoretical risk premia which – as a by-product – are also estimated. We apply this procedure to data from the German electricity exchange EEX, where we split the empirical analysis into base load and peak load prices. We find an overall negative risk premium for the base load futures contracts, except for contracts close to delivery, where a small positive risk premium is detected. Peak load contracts, on the other hand, show a clear positive risk premium, when they are close to delivery, while contracts in the longer end also have a negative premium.

Suggested Citation

  • Benth, Fred Espen & Klüppelberg, Claudia & Müller, Gernot & Vos, Linda, 2014. "Futures pricing in electricity markets based on stable CARMA spot models," Energy Economics, Elsevier, vol. 44(C), pages 392-406.
    • Handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:392-406
    DOI: 10.1016/j.eneco.2014.03.020
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    References listed on IDEAS

    as
    1. Claudia Kluppelberg & Thilo Meyer-Brandis & Andrea Schmidt, 2010. "Electricity spot price modelling with a view towards extreme spike risk," Quantitative Finance, Taylor & Francis Journals, vol. 10(9), pages 963-974.
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    3. Brockwell, Peter J. & Davis, Richard A. & Yang, Yu, 2011. "Estimation for Non-Negative Lévy-Driven CARMA Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 250-259.
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    More about this item

    Keywords

    CARMA model; Electricity spot prices; Electricity futures prices; Continuous time linear model; Lévy process; Stable CARMA process; Risk premium; Robust filter;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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