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Residual shape risk on natural gas market with mixed jump diffusion price dynamics

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  • Janda, Karel
  • Kourilek, Jakub

Abstract

This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-flexible standard baseload product available on wholesale market. Because of this inflexibility, energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as the difference between spot and forward prices weighted by residual unhedged position whose size depends on the shape of customers’ portfolio of a given retail energy supplier. We evaluated residual shape risk over the years 2014–2018 with a real portfolio of a leading natural gas retail supplier in the Czech Republic. The size of residual shape risk in our example corresponds approximately to 1 percent of the profit margin of the natural gas retail supplier.

Suggested Citation

  • Janda, Karel & Kourilek, Jakub, 2020. "Residual shape risk on natural gas market with mixed jump diffusion price dynamics," Energy Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:eneeco:v:85:y:2020:i:c:s0140988319302464
    DOI: 10.1016/j.eneco.2019.07.025
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    References listed on IDEAS

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    Cited by:

    1. Tong, Yuan & Wan, Ning & Dai, Xingyu & Bi, Xiaoyi & Wang, Qunwei, 2022. "China's energy stock market jumps: To what extent does the COVID-19 pandemic play a part?," Energy Economics, Elsevier, vol. 109(C).
    2. Svoboda, Radek & Kotik, Vojtech & Platos, Jan, 2021. "Short-term natural gas consumption forecasting from long-term data collection," Energy, Elsevier, vol. 218(C).

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    More about this item

    Keywords

    Natural gas markets; Spot prices; Forward prices; Residual shape risk;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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